The Truth About Life Insurance By Dave Ramsey.

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.

People who read this also checked out:

• The Truth About Debt
• The Truth About Debt Consolidation
• The Truth About Debt Management
• The Truth About Credit Card Debt
• The Truth About Debt Help
• The Truth About Debt Reduction
• The Truth About Bankruptcy
• The Truth About Budgeting
• The Truth About Teens and Credit Cards
• The Truth About Money and Relationships
• The Truth About Debt and Relationships

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.

Ask The Expert. Umm?

Here is an article written by By Walter Updegrave, Money Magazine senior editor.  I want to point out some of the flaws in traditional thinking.  As I add my comments to this article I want to give my disclaimer…My comments are not aimed at the writer or the magazine.  I don’t know him.  My aim is at traditional thinking and ideologies.  The article will be in black and my comments will be in red.

Do you want to be your own banker?

Buying an ‘infinite banking’ life insurance policy may not be the best way to build long-term wealth for retirement.

By Walter Updegrave, Money Magazine senior editor

December 30, 2008: 12:27 PM ET

NEW YORK (Money) — Question: An adviser has been telling me about a concept that he calls “infinite banking.” Apparently, it involves using a life insurance policy to become my own banker. It seems like a good idea, but something doesn’t seem quite right to me. Do I have cause for concern? – Matt, St. Louis, Missouri

Answer: This concept that your adviser is touting has nothing to do with banking, It has everything to do with banking…you are doing the same thing banks do which is turn your money over and over and capture interest on loans. at least not in the sense that any normal person thinks of it.  Is normal person thinking what has gotten everyone in the position they are in i.e. 401k’s down 50% and foreclosures out of control. And the only thing “infinite” about it, in my opinion,  Opinions are the problem with all the advice that has been given over the last 30 years.  Why don’t we find out the facts when making life decisions. is that it represents yet another in the seemingly infinite number of ways people can come up with to induce you to invest in life insurance.  I guess new ideas are out of the question since all of the traditional ones have done so well.

Now, I want to be clear. I have nothing against life insurance. Virtually everyone who has family members depending on him or her for their livelihood should have a life insurance policy,  No one needs life insurance…it’s a want. as it’s the only financial product that can replace income when a breadwinner dies.

I think the best way for the overwhelming majority of people to get the valuable protection life insurance affords is through a low-cost term insurance policy, Has anybody ever stopped to prove to you that it’s the best way to get protection? although in some circumstances other types of policies can also make sense.

The downside

What I do object to, however, is advisers employing mumbo-jumbo and financial sleight of hand to convince people that they should be plowing money into certain types of life insurance policies when they’re likely better off in more conventional investments or simply funding regular old retirement plans like 401(k)s and IRAs.  If funding a 401k instead is better then why don’t we just go to Vegas and put it all on red…at least you could have free drinks.  It seems like “mumbo-jumbo to tell someone to keep funneling money into a stock market that just lost 40-50% of it’s value and there is no end in sight.

When you strip away the gibberish surrounding pitches like infinite banking,  How about Dollar Cost Averaging, Diversification, Asset Allocation and Buy Term and Invest the Difference.  Everyone of these “pitches” have FAILED. it basically comes down to this: You should invest in cash-value life insurance because it pays dividends Remember to state Non-Guaranteed Dividends (which aren’t taxed as long as they remain within the policy) and you can borrow against the policy. Somehow, these dividends and the ability to borrow are supposed to make you a banker. Right.  If the homework would have been done before this statement it would have been found that those thing are not what makes you a banker.

At its core, this spiel is similar to other questionable life insurance sales tactics I’ve written about, such as the “7702 (a) Private Plan” pitch, which essentially couches life insurance policies as an IRS-approved retirement plan.  Do your homework on these policies.

I don’t know what, if any, specifics this adviser discussed with you. But what these sorts of sales presentations tend to gloss over are the high costs of investing via life insurance The truth is that as a long term strategy term insurance is the most expensive way to buy life insurance…If you don’t die during the specified time period then you have wasted all of those premiums plus what you could have done with them somewhere else and the fact that borrowing from a policy can have serious downsides.  If not managed correctly.  I would say it’s a lot cheaper then losing 40% of my retirement account.(See more on those drawbacks.)

To be honest, I don’t think this sort of proposal is worth a lot of serious consideration. Obviously there was not much serious effort put into research before writing this article. But if you’re sufficiently intrigued by it and the adviser has given you concrete figures and projections, you can always hire a financial planner on an hourly fee basis to do an independent analysis.  The same financial planner that told me to max out my 401k and fund my Roth IRA.  The same one who told me that Assett Allocation will keep my money going up even when the markets down.  The one who told me I would have enough to retire at a certain age and then 2008 happened. The same one that projected out my future using a 12% return because that was the average and the market will always be on an upward trend. The one who told me to save for my kids education in mutual funds. I would say that I don’t think I would spend any money on planning that has been proven not to work.

Lower life insurance costs

Ultimately, I think what you’ll find is that your best shot at building long-term wealth for retirement and your overall financial security is to keep your life insurance costs down by buying a term policy. That will free up more money that you can then contribute to tax-advantaged retirement accounts like 401(k)s and IRAs (preferably investing that money in low-cost investments like those on our Money 70 list of recommended mutual funds and ETFs).  Thats interesting that after  beating up a legit strategy that was not fairly looked into…There is a reccomendation to buy specific mutual funds HMM?  If you look hard enough you will find that there is always some financial motivation to peoples advice.

So the next time this or any other adviser starts telling you he’s going to let you in on some little-known and unique strategy that will put you on the road to riches, just remember: There is no magical path to financial success. There are, however, an infinite number of ways you can get hurt looking for one.  Or maybe we could start thinking for ourselves instead of others doing the thinking for us.

Banking Article

Here is an interesting article on the Infinite Banking idea. Read it and tell us what you think or maybe questions you might have. Enjoy ..

http://www.nuwireinvestor.com/article.aspx?id=57

Infinite Banking.

Infinite Banking is a strategy that many of our clients are using. The basic idea is that every time we purchase a car or equiptment…there is a cost. We either pay interest to a bank or lose out on interest opportunity if we pay cash. The banking concept consists of building your own bank inside of a dividend paying whole life policy. You then pay for your car with the cash values from the policy…then you pay your self back principle and interest payments. Now you would recapture a portion of that interest. Here is a good site that will explain this concept…

http://infinitebanking.org