To say that Dave Ramsey is not a big fan of Whole Life insurance would be an enormous understatement. Mr. Ramsey thinks any cash value life insurance is a very bad deal. In this article, we will look at Dave Ramsey’s views on cash value insurance, including both whole life and universal life. To read our more general review on Dave Ramsey with respect to life insurance, please click here.
To see instant term life insurance quotes (including Term for Life), please use the quote engine on this page.
Whole life insurance falls under the broad category of Permanent life insurance. Permanent life insurance, as the name implies, is meant to stay in-force for your entire life. In the category of permanent life insurance is the following:
- Whole Life
- Universal Life
- Final Expense (burial insurance)
Most people equate permanent life insurance with cash value insurance. After pouring over Dave Ramsey’s online material and books (I went through Financial Peace University 1n 2008), I couldn’t find a distinction between the different types of permanent insurance.
There is one type of permanent insurance that is not designed to build cash value: Guaranteed Universal Life (GUL). GUL is often referred to as Term to 100 or Term for Life since it is very similar to term life. The death benefit is guaranteed to extend to a “dial-in” age between 90 and 121. We provide a review of GUL in an article here.
Whole Life and Cash Value Insurance
Although there is more than one type of cash value insurance, we will equate whole life with cash value for the sake of simplicity.
Dave Ramsey isn’t fond of whole life insurance (cash value insurance) for a few main reasons, which are listed below:
- Much more expensive than term insurance
- Rate of return on investment component in whole life is lower than other types of investments
- Never mix life insurance with investments
- There should not be a need for life insurance beyond 20 or 30 years
Whole Life is Expensive
We agree with Dave’s assessment that whole life is expensive and often times unaffordable. Not only is it expensive, it is often oversold by aggressive life insurance agents. In a recent article we talked about Dave Ramsey’s views on term life.
Whole life insurance is the most expensive type of permanent insurance. It cost more than universal life insurance because of the guarantees. It’s tough to compare term to whole life because they are very different types of products. With whole life insurance, your death benefit is guaranteed to be paid as long as the premiums are paid. Whole life is a “slow and steady” way of accumulating wealth.
Dave doesn’t get into the details of whole life insurance, but he does provide some examples of how the cash value growth pales in comparison to the results of investing in mutual funds over the course of 30 years. Of course, Dave uses very high rates of returns in his examples. We agree, that a 10% to 12% rate of return is excellent, but mutual funds carry risk and most experts think those high rates of return unrealistic.
If you think you can earn 10% to 12% in the market, then you probably have a higher risk tolerance. If that’s the case, then whole life is probably not the right product for you.
It’s not always an either/or proposition.
Some folks like the idea of having some permanent insurance, whether it’s whole life or guaranteed universal life (term to age 100). If the total need for life insurance is $1,000,000 then selecting $150,000 in permanent and $850,000 in term could be a good solution.
If investments to grow as expected or other life events occur, the need for life insurance could extend well beyond 20 or 30 years.
“Never Mix Life Insurance with Investments”
Dave Ramsey urges people to keep your investments and life insurance separate. He wants you to buy term and invest the rest. We agree, that strategy can work well for most people. However, we also realize folks want to diversify their investments and sometimes whole life or another type of cash value policy can be a small part of a financial plan. Again, it’s not always either/or, but sometimes both.
We have received referrals from fee-only financial planners. Fee-only (as opposed to fee-based) planners do not sell any products for a commission. They receive no benefit from recommending any type of insurance. Many fee-only planners have an insurance background and understand life insurance better than most financial advisors. When we talk to these fee-only planners and discuss their reasons for recommending cash value life insurance, the answers vary.
The bottom line is there are times when a whole life policy or another type of permanent policy can be a smart move for some people, depending on many factors, including risk tolerance, health, family situation, etc. It’s beyond the scope of this article to look at a detailed analysis as to how whole life insurance can be smart financial move, but we will be glad to talk about your specific situation.
Is There A Need For Life Insurance Beyond 20 or 30 Years?
Although we have addressed this question, it warrants some elaboration. It is not uncommon for us to receive phone calls from people in their 50s and 60s requesting advice and quotes for life insurance. In most cases, the person realized their term insurance expires and they still need coverage.
The reasons for extending coverage beyond 20 or 30 years varies. Some people experienced setbacks with employment (income) and couldn’t invest money as they had planned. Others had health challenges (either themselves or a family member) that caused a financial setback.
Sometimes, there is not particular setback, but there is a realization that they want to provide money for their loved ones after their death. It’s not always a need (or a result of crunching numbers). Providing a tax-free life insurance benefit to a spouse or children can sometime be a matter of the heart.
When Paying More For Life Insurance Makes Sense
You might decide to pay more for one of the safest minivans or SUVs when you could spend a lot less on an inferior make and model. Why? You realize that although a serious accident is unlikely, you don’t want to take any chances. You and your family are too important and the additional cost is well worth the peace of mind, knowing you are doing everything you can to protect your family.
The same principal holds true for life insurance. Sure, you are most likely not to need life insurance beyond a certain term period if you invest wisely and not major life setbacks occur. However, purchasing a small permanent policy such as whole life can provide that extra peace of mind to you and your spouse (and/or children), knowing you are doing everything you can to protect them.
Dave Ramsey on Whole Life – Conclusion
In conclusion, we have addressed Dave Ramsey’s position regarding whole life. Dave is a very smart guy and knows far more people will benefit from his advice, then those that won’t. We admire Dave have not desire to discredit or debunk his ideas. However, we think it’s important to look at the numbers carefully and decide whether you think you want to go “all in” on buy term and invest the difference.
As we explained, sometimes it’s not “either/or”, but both. If you are more conservative and don’t put a lot of trust in the stock market, then perhaps it’s worth considering buying a small amount of whole life or another type of permanent life insurance product.
Please call us for a free consultation and customized quotes. We are happy to help you make the best decision for you and your family.