If you're in the market for life insurance and do a little research online, you'll probably come across advice from Suze Orman. Life insurance is one of her favorite topics, and she consistently advises her viewers to "buy term and invest the difference." Let's take a look at what that means, and then take a look at why that's not always your best strategy.

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Buy Term, Invest the Difference

Suze suggests you buy a term life policy because it's always cheaper than a whole life policy. Instead of paying higher premiums for a whole life policy, she'd rather see you pay small premiums and invest the difference.

For example, if a 30-year term policy would cost you $30/month and a whole life policy would cost you $120/month, Suze Orman would tell you to buy the term policy and invest that $90 in a Roth IRA or a mutual fund.

The theory behind this is that you can earn a greater return through a Roth IRA or mutual fund than you can through the cash value attached to your whole life insurance policy.

But is that really the case?

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Getting the Best Rates of Return

The object of the game is to get the most for your money. If the stock market has steady gains without a lot of big drops, an IRA or mutual fund might be a good solution. In the 1980s and 1990s, for example, financial advisors often felt comfortable projecting an 8% rate of return for an investment in an IRA or mutual fund.

But we're in a whole new ball game right now.

Eight percent is no longer a certainty. For many do-it-yourself investors, it's extremely unlikely. Market drops and a shaky world economy mean that consistent gains are a thing of the past. In fact, the T. Rowe Price Group provided an example in the Wall Street Journal of how a market drop can severely hurt your retirement account balance. Here's the scenario they shared:

A retiree retires in the year 2000 with a portfolio of 55% stocks and 45% bonds, planning to withdraw about 4% per year for living expenses (adjusted for yearly 3% inflation). But from 2000 to 2010, because of the stock market's turbulence and the poor returns of bonds, that person's account balance would have fallen by one-third.

One-third of that person's hard-earned money, gone! So how can a whole life insurance policy do better?

It eliminates volatility and gives you set rates of return. The rate of interest your earn on your cash value is locked in when you buy your policy. Interest rates are rising, which only makes this a better and better proposition. If that rate is 3%, you'll never earn less. If that rate is 4.5%, even better. When the next oil crisis or diplomatic crisis results in a market crash, you're insulated against that loss. You'll continue to grow your money no matter what the stock market does.

It's a trade-off that many near-retirees are liking. Are you after security and a guaranteed return, or are you after possibly larger gains (and possibly large losses)? The choice is yours.

Of course, the number one reason to buy any life insurance policy is to provide your loved ones with peace of mind and financial security should something happen to you. It's easy to forget once we start talking about cash value and investments, but the true value of life insurance is in taking care of the ones you love.

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Note: Policy loans and partial withdrawals may vary by state, reduce available surrender value and death benefit or cause the policy to lapse. In most cases, policy loans or partial withdrawals won't be taxable as long as you limit your withdrawal to the amount of premiums you've already paid. Consult all policy documentation or your agent for details.