The Truth About Dave Ramsey – My Response to Dave Ramsey’s Article “The Truth About Life Insurance,” Part 5
Posted by: BeamaLife Editor on 17 Aug, 2010
For the past few of weeks, I’ve discussed Dave Ramsey’s assertion that whole life insurance is “one of the worst financial products available,” a claim he made while extolling the virtues of term life insurance. Earlier, I likened that comment to someone saying that a screwdriver is one of the worst things you can buy in a hardware store. What I mean to say is that there is a tool for every job, and to rank one as “worst” is to ignore the fact that it really depends on the situation at hand.
I must say though that, out that out of the financial products available, I can’t think of a better one than whole life insurance for the purpose of ensuring and insuring the well-being of a family after the death of a provider.
Let us view stock market investments, for example, in a similar light. Were you to die today, would the shares in your portfolio provide for your family’s needs, pay for the education of your children, or let your spouse continue living the lifestyle to which he or she has become accustomed? Of course not. And this is not necessarily due to any inherent fault in stock market investments as financial products. Rather, they are simply not designed to give you the assurance your family would need in the event of a tragedy.
Conversely, I am not trying to insinuate that term life insurance is never a good idea – simply that it depends on the circumstances. If you can’t afford a whole life insurance policy, but need to protect your family, then a term life insurance policy will work fine in its place.
But the truth of the matter is that whole life insurance comes with more benefits. Whole life insurance is a biggest tax loophole out there, for starters. It provides tax deferred growth, tax free death benefit, estate tax free if you structure policy in a right manner, tax free access to cash value via loan, very competitive internal rate of return with guaranteed cash value, creditor protection, unlimited contribution, collateral and disability waiver.
The last thing any financial expert wants, though, is for a person to feel paralyzed by arguments about what kind of life insurance to get, and to feel discouraged from getting any of it. The most important thing to make sure of is that your cover yourself, and that you do so to your fullest human life value. When deciding, though, keep in mind that the myriad of different life insurance policies available are like medicines in a pharmacy – what you need depends on your diagnosis, and prescription given by your doctor.
I have found myself wishing that Dave Ramsey – and other like-minded, well-meaning financial gurus – would stop advising people to buy term life insurance – using broad, sweeping generalizations in the process – when whole life insurance is, in so many cases, a much better product for the risk they are looking to minimize.
And, in conclusion, the truth about Dave Ramsey is that, though he may not receive commission for advising you to buy life insurance, he is definitely getting a term life insurance website endorsing fee. Some may feel that is a form of commission in and of itself – myself included.
The Truth About Dave Ramsey – My Response to Dave Ramsey’s Article “The Truth About Life Insurance,” Part 4
Posted by: BeamaLife Editor on 8 Aug, 2010
Imagine you’re 50 years old, and your term life insurance coverage is ending. The money you’ve been investing for the last 20 years is not worth nearly as much – in real dollars or in dollars adjusted for inflation – as the financial guru who sold you on this idea led you to believe it would be. What would be going through your mind?
First, your age alone would be a concern. At 50, you’re in the same shape you were in twenty years prior. It is likely you’ve developed health conditions related to your age that you weren’t afflicted with when you first purchased your term life insurance policy. The new policy you would have to buy would be more expensive due to these new factors. Depending on your ailments, you may be almost impossible to insure at all due to the increased risks.
Second, you’re concerned about juggling this new, increased expense with your present bills and obligations. You may have children that are still in college – or even in diapers. Yet you know can’t neglect the need for life insurance because of your other financial responsibilities.
And third, you’re thinking about your spouse, and where they would be left in the event of your death. Would he or she be able to continue living the way you presently do, if you were gone? Would your house be paid for? Would those remaining investments allow for a comfortable retirement?
The person who, twenty years ago, bought the more expensive whole life insurance policy is not paying the premiums anymore. His family is still protected, while you’re trying to figure out whether or not to buy a much more expensive term life insurance policy or a whole life insurance policy with a benefit that is far less than you need, as you’re working within the confines of a spread budget.
When I was a child, we would be able to declare a “do-over” while playing a game in gym class. But life isn’t like that – every decision has consequences. So the onus is on you to make the right decision the first time, or at least to strive toward doing so. Financial mistakes can be costly, not only for you, but for those you care about most.
Next time, I’ll summarize my arguments against Ramsey’s term life insurance endorsement.
The Truth About Dave Ramsey – My Response to Dave Ramsey’s Article “The Truth About Life Insurance,” Part 3
Posted by: BeamaLife Editor on 5 Aug, 2010
It may come as a surprise to you, but I agree that the advice to “buy term and invest the difference” is a great prescription for a bright financial future. I also think that “do unto others as you would have them do unto you” is a great prescription for a happy society.
But the real world is very different. You don’t have to look far to find situations where human pride and selfishness has led to the trampling of the rights – and happiness – of other people. And you don’t have to look far to find examples of why “buy term and invest the difference” rarely works for your finances or life insurance.
In Dave Ramsey’s article, he uses the example of a 30 year-old man who has $100 per month to spend of life insurance. According to Ramsey, the cost of a whole life insurance policy from each of the top five life insurers would cost about $100 per month to purchase $125,000 in coverage. A comparable term life insurance policy, Ramsey asserts, would cost about $7 per month (Actually, I checked top 100 life insurance companies and even for the best possible health class it is at least $15 per month)
Ramsey suggests that if this hypothetical person bought the term life insurance policy, and invested the difference – $93 per month – at the end of 20 years, he’d have more money than if he’d bought the whole life insurance policy. Is that necessarily the case?
Well, if you’d been investing that money faithfully, starting in 1987 and continuing all the way to 2007, you’d have just reached the end of your twenty years and watch the value of your investments today! I don’t think there’s anyone out there who is willing to state that investing your money is a safe way to guarantee its continued growth.
But let’s just say that you did average 10% annually on your investments, and there were no market corrections – all of your stocks and bonds and mutual funds performed exactly as you’d have liked them to perform Then, you have to account for your expenses – every transaction costs money, and just for managing your money, investment houses charge a fee. So, you have to take that part out of your return.
And, of course, there’s inflation. Each year, over those 20 years, your money is becoming worth less and less. So that’s another couple of percent that you need to deduct for inflation. Take that part out of your return, and what looked so stellar a few moments ago does not look at all stellar right now.
Next time, I want to explore the sinking feeling that sets in when most “buy term and invest the difference” devotees figure out they made a very poor choice – one that it’s too late to change.
