The Truth About Life Insurance By Dave Ramsey.

February 8, 2009 6 Comments

Here is an article I ran across when I was searching the term “Life Insurance” on google.  Dave Ramsey is considered to be a financial guru by a lot of people.  He seems to focus on getting out of debt.  He has a plan called “The Total Money Makeover.”  I have decided to add my comments to this article in the color RED.  This is not to talk bad about the author.  I am referring to Ideas and to Traditional thinking.

Here it is.  Enjoy!

The Truth About Life Insurance

Myth: Cash value life insurance, like whole life, will help me retire wealthy.  What is “wealthy”?
Truth: Cash value life insurance is one of the worst financial products available.  This is a very strong statement that I have never had anyone prove to me with facts that it has any validity.  This is what I call a Sound-Byte (something is said so many times we just decide it’s true).  Is he saying that losing half of my mutual funds in one year is better then a Guaranteed growth, liquidity and preservation of principle in a whole life policy?

Sadly, over 70% of the life insurance policies sold today are cash value policies. Another interesting statistic is that less than 1% of all term policies industry wide actually pay out. Why?  People are outliving them and letting them lapse. A cash value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are HORRIBLE.  There are a few people who would probably disagree such as a guy named Walt Disney.  A few others might also disagree… James Cash Penny… Doris Christopher… Ray Kroc.  All of these ultra successful people all borrowed against their whole life policies to either start their huge companies or to keep them going during hard times.  The growth inside of a whole life policy is not limited the Internal rate of return.  Because it is easily accessible and doesn’t go backwards…You get to determine your return. Your insurance person will show you wonderful projections, but none of these policies perform as projected.   If we are talking about perfomance and projections…we should then talk about the fact that This guru projects out peoples mutual fund at 12% (“ANSWER: No, don’t do that. Certificate of deposits are not a secure investment. They average about 4% and that’s also the inflation rate. By the time you pay taxes, you’ll lose money. Get away from your broker if they are giving you information like this. Invest in good growth stock mutual funds that average about 12 percent. Put it in growth, growth and income, balanced and international.”)????  By the way in a whole life policy there is a guarantee column next to the projected column on the ledger.

Example of Cash Value

If a 30-year-old man has $100 per month to spend on life insurance and shops the top 5 cash value companies, he will find he can purchase an average of $125,000 in insurance for his family.  The pitch is to get a policy that will build up savings for retirement, which is what a cash value policy does. However, if this same guy purchases 20-year-level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100.

WOW! If he goes with the cash value option, the other $93 per month should be in savings, right? Well, not really; you see, there are expenses.

Expenses? How much?

All of the $93 per month disappears in commissions and expenses for the first 3 years.  Depends on how the policy was built. After that, the return will average 2.6% per year for whole life, 4.2% for universal life, and 7.4% for the new-and-improved variable life policy that includes mutual funds, according to Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazines.  The same mutual funds outside of the policy average 12%.  There it is again.

The Hidden Catch

Worse yet, with whole life and universal life, the savings you finally build up after being ripped off for years Wow strong words again.  It seems like to me that if I bought that term policy for 20 years and didn’t die then I lost the monthly premium plus what I could have earned on it in something else.  You will never re-coop that money.  That seems to be a huge rip off. don’t go to your family upon your death.  The only benefit paid to your family is the face value of the policy, the $125,000 in our example.  If you use this strategy you won’t get your face value either.  All you have is your mutual fund account and all the fees and taxes that go along with it.  I would bet that everyone who has used this strategy and died today would have a far larger tax free inheritance then what is left in their 401k and IRA…Oh and what about the taxes?

The truth is that you would be better off to get the $7 term policy and and put the extra $93 in a cookie jar! At least after 3 years you would have $3,000, and when you died your family would get your savings.  UMM?

A Better Plan

If you follow my Total Money Makeover plan, you will begin investing well. What does well mean? Then, when you are 57 years old and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, We will have that? you’ll become self-insured. That means when your 20-year term is up, you shouldn’t need No one needs life insurance.  It is a want. life insurance at all – because with no kids to feed, no house payment, and $700,000, your spouse will just have to suffer through if you die without insurance.

Don’t do cash value insurance! Buy term and invest the difference.  Once again I don’t see any proof of this statement.  When we are only given half of the story…we can’t make sound life decisions.  I am not a guru…just a person who wants to see all of these gurus that Americans trust and do what they say…give us full-disclosure on these major decisions.

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This content is provided by DaveRamsey.com and may be used only in its entirety with all links included. Dave Ramsey is changing the face of America by helping people understand life insurance and get on the path to being debt free.

Filed under Life Insurance, Retirement, Uncategorized

6 Responses to The Truth About Life Insurance By Dave Ramsey.

  1. The Life Insurer says:
    February 16, 2009 at 9:03 pm

    This is great information. The “gurus” have been taking pot-shots at whole life insurance for quite some time. I would like to compare the recent stock portfolios of some of these experts with a whole life policy from a mutual company that has been paid into for a good period of time. My money is on the performance of the whole life policy.

    Reply
  2. ward ripley says:
    May 13, 2009 at 3:47 pm

    have you read the book by Nelson Nash be your own banker, or the newly released, Bank on Yourself by Pamela yellen.

    ward

    PS i’ve read your book & loads of other books, great for people to live debt free, and control there money

    Reply
  3. Scott McCright says:
    October 19, 2009 at 7:46 pm

    First of all, yes, I sell life insurance, and have for almost 20 years. I have been reading for many years now that life insurance is a product that is based on one’s needs. It is in fact NOT a product that is based on one’s needs nor has it ever been. I actually laugh when I listen to someone like Dave Ramsey. I will use a an example: I have mortgage debt, auto loans, credit cards, student loans, what ever the situation is, it’s all relavant. Thinking Micro-economically, we buy life insurance to pay these off. And according to the “NEED” that’s all we should buy. However, When you figure all of this out, there is one major question that still needs to be addressed, and it’s not going to come from some idiot telling you their answer. It comes from YOUR heart not from any need. The question is if I am gone from a death, how much of my economic input to my family do I want to provide for them. How long do I want it to last, and what rate of return can my spouse, or kids, get on this money? My personal answer… 100% of it and them some. My wife is my best friend, my savior, my heart and sole, you get the picture. I could not survive without her. She means that much to me. Why would I cut her short just because I am gone? Why did you get married to your spouse? Because you love him/her. Even though debt may be gone there is still the start over factor. Worrying about another spouse coming into the picture, and passing the money past this person to your kids in the occurance of your spouse’s death, , can simply be taken care of through something like a QTIP Trust. The difference between term and whole life is another humorous subject. Term have no long term future financial benefit. Is it cheaper, sure if you die. If you don’t die it will cost you over your lifetime more than any other type of policy. Why, because when you transfer wealth away, or pay money into something with no return, you not only lose the money going in but also it’s earning capability. I have never heard Ramsey talk about Lost Opportunity Cost or how it relates to your financial life. If I don’t die, and cancel the policy, I lose not only my premiums to whenever I cancel the policy, but also whatever it could have earned, not to when I cancel it, but to the day I die! You have to also account for the fact that your family now has an additional cost for your, so called, plan. Can anyone guess what this is? It’s the largest cost of them all. THE BENEFIT AT DEATH!!! This is not rocket science folks, it’s simple math, and little understanding about how money actually works for you. There is no magic product that will get you to the top. It is a plan! and working with advisors that understand how to think Macro-Economically! What’s the definition of ignorance? Taking advice from someone who does not have a clue as to what they are advising you on. This alone, is the biggest reason people fail to succeed! You must be aware of where you have wealth transfer taking place. Term Life Insurance is one of them! Of course unless you die holding the policy. OK, here’s something to think about: If I pay in premiums for 30 years in the amount of $750 per year, I have paid in $22,500. Cheap right? Here comes the part that nobody talks about… That money at 5% could have put $ could have grown to $52,321. Getting more expensive!!! That’s still not the end… I now stop paying premiums but the $52321 still grows because I will NEVER get it… Taken the mortality table numbers for a healthy male, (age 85) we add another 22 years onto this scenario. Now your cheap term policy cost you $153,053. NOT VERY CHEAP IS IT? Lets go macro for a moment… If I have a mutual fund growing at, let’s say 7%, putting in $7500 for the 30 years would grow to $758,048. Subract the total cost of my term policy of $153,053 and it reduced my return to 5.79%. Take off another $159,914 in taxes, not to mention the lost opportunity costs on these as well, (@25% federal 5% state) and now my net or external rate of return is a whopping 4.10% and I had to take RISK to get this. GREAT PLAN! 75% of my client base have a household income of over $200,000 per year. It’s ironic how these people know already not rent such an important asset like life insurance or let’s call it your family survival tool! You must own it! Period. We all have term to get through the years that our whole life builds in value. But it is NOT your primary source of survival for your family. Your family loves you and I hope you love them! Stop listening to all the BS about how term is cheaper, fullfills your NEEDS, and how whole life is, as Ramsey puts it, one of the worst financial products that you can buy. I think he needs to actually learn something about it before talking out his backside… Don’t be ignorant!

    Reply
  4. tom says:
    December 11, 2009 at 12:44 am

    MMM…interesting piece scott!! I’m curious….. you do a lot of talking about how bad term life is but what about the whole life portions. Now what everyone here forgets is lets compare apples to apples…the same amount of coverage in whole life compared to a 35 year term policy. Take the cost difference and invest that and lets see what the results are. Oh and what about another thing…commisions…need we tell the public that you as an agent gets paid 5-10 times the commisions to sell a whole life policy instead of a term…so are you selling for the clients best interest or YOUR best interest. Next what about the Cash Surrender Value inside a whole life policy…again I repeat SURRENDER VALUE!!! Its amazing how insurance company’s are allowed to steal the consumers savings isn’t it!! Yet can we also mention that insurance company in the past have has lawsuits filed against them and are again having them filed like against giants like London Life because of such policy’s. Now if your going to voice your opinion about such things as you have commented maybe you need to do some more homework yourself because you have obviously been brain washed like the rest of the life insurance agents out there. I have read a ton of books on personal finance and they ALL say to buy term and invest the difference…..now I don’t think that David Back, Dummies Finance for Canadians, the wealthy barber and hundereds of other books would lie. Now there isn’t any books on whole life and universal life is there….I wonder why!!
    Anyways…do your research first and find out the truth everyone!!
    BUY TERM, INVEST THE DIFFERENCE…Invest the diffeerence in a properly diversified portfolio!!!

    Reply
    • Scott McCright says:
      January 13, 2010 at 10:17 pm

      A Reply to Tom:
      Some books I would suggest for you to read: Read them again and again until you receive the message loud and clear. “Pirates of Manhattan” By Barry Dyke, “Secrets of the Millionaire Mind” by T. Harv Eker, “Who Took My Money” by Robert Kiyosaki, “Live Your Life Insurance” by Kim Butler “Unintended Consequences” by Leonard Renier, “The Little Book of Common Sense” by John Bogle, “Beyond Majority Thinking” by Ronald Schultz, “Economics in One Lesson” by Henry Hazlitt, “The Mystery of Capital” by Hernando De Soto, “Becoming Your Own Banker, The Infinite Banking Strategy” by R. Nelson Nash, “The Richest Man in Babylon” by George Clason, “Killing Sacred Cows” by Garrett Gunderson, these are just to name a few. These are all very BRILLIANT authors. Learn from them.
      Wealth is not built by using a specific “Product” like life insurance, or mutual funds, or what ever you fancy. And if you’re stuck on “commissions” stop reading now, I feel sorry for you because you’re never going to financially succeed in life anyway. You live your life through “Scarcity Thinking” (Defensive) instead of having an abundance (Offensive) mindset and I suggest you get a personal coach to beat this out of you. Financial products are merely the nuts and bolts in the building you are trying to build. THAT’S ALL!!! And, there are millions of products to choose from. It takes a carefully thought out, step by step plan that will work under any circumstances to build the building (Your Financial Success). Architects, attorneys, electrical engineers, design engineers, accountants, schematics, foreman, and of course the nuts, bots, nails, cement, etc… You are comparing the nuts and bolts without the actual plan or design first. You get the picture. Permanent Life Insurance as a stand alone financial vehicle or “Bolt” if you will is mediocre at best. But when placed correctly in a carefully thought out plan (The design), it actually turbo charges the plan. An example would be Walt Disney. Walt Disney was worth hundreds of millions of dollars, why would he possibly need Whole Life? He had Millions and Millions of it on himself because he understood how it fit into his life and into his estate, and all of its dimensions. It was not only his permission slip to spend and enjoy his wealth, but it also funded the first Million dollars that went into building Disney World in Florida. Walt Disney had the finest financial advisors, accountants and attorneys that money could buy at the time. Are you going to call them wrong as well? This is only a guess, but I would say Dave Ramsey is just a bit out of their league!!! Take Malcolm Forbes: When he died, he was worth over $400,000,000. Why did he have a $40,000,000 whole life policy in place when he died? Again, he understood the Macro-Economic value having such a great financial tool placed into his plan, and again he worked with the finest advisors out there who suggested it… Were they wrong too? I think not… Again I would bet they were just a bit out of Suzy Orman’s league… I mean absolutely no offense by this, but if you are going to read, study, and take advice from the media and authors who are primarily talking to lower middle class people, then that’s where you will end up. Highly successful individuals are not listening to the Dave Ramseys or the Suzy Ormans of the World. They are not talking to them. Do you think that Davey Ramsey would have the nerve to tell someone making $500,000 per year to do a 401(K) plan? I think not, he would get laughed at. Highly successful people don’t lock their money up. And they don’t give up control. First rule in their bible is “Velocity” or keep your money available for other opportunities. One such way they do this, is to use a Whole Life policy to run money through. Not into it, through it!!! They put premium dollars in to pick up all the benefits that the policy offers (disability waiver on the premium, liability protection on the cash growth and death benefit in most states, loan provisions and collateralization for the purchase of real estate or business ventures, tax deductions on the loan interest paid for investing, college funding, buy sell, key person, money purchase, and stock redemption planning provisions for business owners, Estate Planning Trusts can be established (ILIT) keeping the death benefit out of the estate evaluation at death, thus being available to pay Estate taxes leaving the inheritance true to the heirs, Charitable Remainder Trusts can be setup on the death benefit while living, thus providing additional tax advantaged income, oh and there is one more thing, the difference between a family or business surviving or possibly failing.) and with whole life this is for life, not just to when someone told you would no longer need it. These were just to name a few.
      I just want to throw in that it is so ironic how people seem to give the most advice on things or topics that know the least about, and others actually listen to them.
      If banks and financial institutions use the velocity of money strategy, and our country survives on it, why would you do something different in your personal life? Another funny thing is that banks, insurance companies, mutual funds, brokerage houses and so on manufacture a product that is for profit. They also write the rules on how they want you to use this product. If you use their products in the way they want you to, by design, you will not, and can not win the game! Take term life insurance for example: in the piece that I wrote before I made an attempt at explaining how hard assets carry a bigger cost than meets the eye. I have been in the financial services industry for twenty years, and sell securities and insurance based products to fit one’s plan. The insurance company pushes the sale of the Term products more than anything else!!! Why, because of the wealth transfer that the customer is shifting to them!!! Again, do the math… How much will your car insurance cost you over your lifetime? The cost of the policy premiums and lost opportunity costs combined. Not to mention, the death benefit that a life insurance company will NOT have to pay! THEY win!!! Not you! They get the use of your premium dollars to make money with, and you transferred that ability to them. This was done by design. If you still don’t get it, get on the web and just look up information on the Lost Opportunity Cost concept. This is actually taught by both the Stanford “Economics” curriculum, and Harvard “Law’. How do you think the court systems determine a value for losses recovered?
      I will say this, if you learn how to pinpoint where all of your personal wealth transfers or lost opportunity costs are taking place, and create strategies on how to stop them and even recover them; it can mean millions of dollars back in your pocket over your lifetime. If you have trouble with this, find an advisor who works by the principals of Macro-Economics instead of some “Financial Planner” that you’re paying a fee to, that will take you down some set path that won’t allow you to reach your maximum financial potential, and talks using the word needs (Scarcity). You want to hear the words wants and desires. If your wants and desires are achieved, you probably won’t have to worry much about your needs being met. I would guess one is higher up than the other. If not, you need a psychologist anyway…
      In closing, now that I typed a book, here are some words of wisdom:
      Live YOUR life. Not your friend’s or workmates, or your neighbor’s. Knowledge rules the World! Love your family and love your life. Make a daily reminder to tell your spouse and kids how very special they are in your life. Start living daily with an abundance and prosperity mindset and make your happiness happen from dreams and desires, not by reaction…
      And last but not least, PROTECT what you love!
      Peace

      Reply

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