First of all I want the reader to understand that I agree with most of what David Ramsey teaches and “rants” about. I lived his model of “Financial Peace” until I was 45 years old and have proved most of his money “Makeover” theories including being out of debt and paying cash for everything. In fact I purchased my own home with zero down just like Ramsey discusses in The Total Money Makeover (paying cash) about the time David Ramsey was filing for bankruptcy 20 years ago. I owned a lot of term life insurance back then and I still own a lot of term life insurance because I believe, just like Dave does, that term life insurance (for a certain age group and specific health classes) is the cheapest and best way to protect future income. And that is exactly what life insurance is all about.[i] Yet when it comes to whole life insurance products I believe that David Ramsey could be more forthright with his audience. For those who don’t follow or listen to Dave what I think doesn’t matter. But for those who do the suggestions which I bring up here could make a huge difference in their financial future. Knowing and understanding the facts is always better than not having the knowledge and understanding which the facts provide.
Accordingly, the 2010 official publication of the American Council of Life Insurers states:
“Of new individual life policies purchased in 2010, 39 percent, or 3.8 million, were term insurance, totaling $1.1 trillion, or 69 percent, of the individual life face amount issued. The most popular form of term insurance is level term, which offers a fixed premium.”[ii]
This fact about life insurance sales leaves Mr. Ramsey facing a tremendous credibility gap when he states in 2010 that
“…over 70 percent of the life insurance policies sold today are cash value policies.”[iii]
His statement about “Do not invest money in life insurance”[iv] is also misleading as life insurance is not an investment according to state insurance commissioners.
“Life insurance isn’t an investment. An investment is a financial risk – you might make money, but you also might lose some or all of your investment. In contrast, life insurance pays a guaranteed death benefit.”[v]
Ramsey argues that for a 30 year old male, “20-year-level term insurance with coverage of $125,000, will cost only $7 per month, not $100″[vi] which is the price he states $125,000 of whole life coverage would cost.
As of this writing a 20 year level term policy with $125,000 of coverage on a healthy 30 year old male costs $11.79 per month not $7. This means Ramsey is using premium costs for term insurance which favor his opinion by over 40%.[vii]
What I find most objectionable about Ramsey’s discussion(s) concerning life insurance is that he avoids a complete analysis of the specifics. For example Ramsey completely ignores the fact that several mutually held or mutually owned life insurance companies have provided dividends to their participant owners (the participating whole life insurance policy owners) for the past consecutive 121[viii] 130 [ix] and even 144 years.[x] Yet Ramsey avoids addressing these exceptional facts about life insurance while boldly stating that you can earn a 12% rate of return investing $500 a month in an average mutual fund. Interestingly, I have yet to find a mutual fund that will pay me a 12% rate of return on my first investment of $500, let alone on any subsequent $500 investments.
Furthermore, Ramsey is silent about paid up additional insurance riders. These riders, which can be added to some whole life policies, would alter the story that Ramsey has elected to tell. Neglecting this topic he states that, “All of the $93 per month disappears in commissions and expenses for the first three years. After that, the return will average 2.6% per year for whole life…”[xi] Adding a paid up additional insurance rider (PUAR) to a whole life policy on a healthy 30 year old male, however would allow the owner to easily allocate 60% of total premium paid (depending on class, and insurability, etc.) towards the PUAR. This simple design process greatly enhances the cash value of a policy beginning in year one.[xii] It also dramatically decreases the commissions earned on this type of policy versus policies that have no PUAR attached. If, in addition to the (PUAR,) an additional term rider is added to the policy the guaranteed cash values can swell to even larger amounts in year one.
Finally, when Ramsey does speak of returns his assertions are misleading in that he speaks only of average rate of return and averages are just averages and do not reflect actual rate of return, as Erik Krom so eloquently articulates in his article Solving the Myth of Rate of Return:
“You see, rate of return is actually comprised of two types of return: average return and actual return. The difference is simple: LOSSES. When calculating an average return, gains and losses are equal in weight. In other words, a +50% followed by a -50%leaves an average return of zero. This part is pretty straightforward. $100k invested would still equal $100k if you average zero. The interesting part comes when you calculate the actual return. Let’s take the same example and actually run the numbers; we’ll see what really happens. When you take $100k and apply +50%; your account will be worth $150k. Then take the $150k and -50%; now you only have $75k. That is a -25% loss from your original $100k. Why is this? Any time you have one year of losses your average return will not equal your actual return. Losses have greater weight and impact on your actual dollars than gains do.
“Another way to look at it is to review the Dow Jones since 1930. If you add up every number and divide it by 81 years, the return “averages” 6.31%; however, if you do the math like we did above, you get an “actual” return of 4.31%. Why is this so important? If you invested $1,000 back in 1930 at 6.31% you would have $142k, at 4.31% you would only have $30k. As you can see from this example, the impact of evaluating average returns as the only measurement could be devastating.”[xiii]
And even when Ramsey does refer to average rates it is obvious to anybody with a basic knowledge of life insurance that he is using life insurance products that have not been designed to provide high cash values early on in the contract. Truth is truth, but those who are bent on a particular philosophy too often use only the parts of the truth which spin their message in favor of their philosophical bent. The facts are: Participating whole life insurance products designed to hold large amounts of paid up additional insurance (using a rider attached to the policy) can earn a guaranteed “return,” just as Ramsey states, of around 2.6%. Yet the owner has the ability to borrow against that policy without penalty and use the capital elsewhere and that message is entirely left out in Ramsey’s message! This possibility exists because of the loan provisions in the contract which make the cash value available to the owner on request. Granted policy loans need to be prudently managed or they, along with withdrawals, reduce available death benefits, policy values and if excessively left unpaid may cause the policy to lapse. And a lapsed policy with outstanding loans will treat those loans as distributions for tax purposes.
Add to this another oversight of Ramsey’s…namely the projected, or non-guaranteed, values which a participating owner of whole life insurance can benefit from… and one begins to realize that Ramsey hasn’t dealt as frankly with his audience about life insurance products as he might think he has.
When comparing permanent life insurance cash values to investment returns, plus the purchase of term life insurance, one needs to be aware that the buildup of non-guaranteed cash values in permanent whole life insurance compare favorably to the non-guaranteed investment results which Ramsey says is a better choice.
A policy can easily be designed to match Ramsey’s recommended investment returns over the past 20 years if one considers the non-guaranteed values of the policy. Yet because those values are non-guaranteed they would only be a mere projection not a guarantee just as Ramsey’s investment returns are mere projections and not guarantees. The real difference is the term insurance which Ramsey says “is all you’ll ever need.” That 20 year term insurance policy premium has now evolved into a premium that in all probability will become an additional part of the statistic which documents that 99.9% of all term policies sold never pay a death benefit.[xiv] Yet the premium on the whole life insurance policy could be 50% to 70% less than what it was when first started 20 years ago because the paid up additional insurance rider has been fully paid and any term rider has been converted or is no longer needed.
Ramsey says he has a better plan but I can’t see how his plan is distinguishable from the plan which I faithfully followed until I was 45 years old. That plan left me tired and weary. Working from five to seven days a week and from 7am to 8:30pm daily, there was no vacation time, little family time and no humanitarian or volunteer time, for me or my family. Yes, I was debt free I literally paid cash for everything. Yes, my house was paid off! I had accomplished that by age 35, 22 years earlier than Ramsey says his hypothetical male will be able to do following his plan.[xv] But I never experienced the financial peace or freedom which Ramsey promises! And even more sobering, I had NO availability or manageability of my hard earned equity.
That is why I value whole life insurance! Participating whole life insurance provides me with guaranteed, available, equity which I can manage anytime I desire by exercising the loan option guaranteed to me in all of my whole life policy contracts. Knowing this provides me with a financial peace and freedom which Ramsey’s program never did. Furthermore, because I believe I need to comply with Proverbs 13:22, which encourages me to leave an inheritance to my children’s children, and not be totally selfish and stop my insurance coverage when I’m 65 or 70 leaving no future income for my children or widow, I can’t in good faith recommend Ramsey’s advice about life insurance to my clients.
“No kids to feed,”[xvi] Ramsey says…perhaps and perhaps not. But there are things that need to be financed all over the world. There are kids who are starving and many good things that can be accomplished if you have the money to manage. Shouldn’t I be concerned with the world that I live in? Shouldn’t I attempt to leave it a better place than when I entered it? Why should I kick back and say, “Soul you have plenty, sit back, take it easy and enjoy life.”[xvii] No, that is not what I want for me, my family or my clients. I want them to have both. Both the $700,000 Ramsey says he can accumulate with his plan plus the millions that will be paid out from the permanent whole life insurance policies which I own on my life along with any term policies I still own at that time! Sadly, with Dave’s plan, even the $700,000 which he projects you might have by age 57 could be long gone before you can outlive it. That is because according to the 2001 Commissioners Standard Ordinary Single Life Expectancy Table a healthy 57 year old male has a life expectancy of 26.46 more years while a super preferred 57 year old male has 27.69 more years to live. Based on these statistics consider the $700,000 you have tucked away at age 57…it will have to last you until you are at least 83 years old.
So if your income is currently $80,000 a year and you would like to live on your own dime with at least 80% of what you are currently earning ($64,000 a year,) you will need $1,280,000 not the $700,000 that Ramsey says you’ll have following his program. Furthermore, you will need to earn 7.62% annually on what you have saved but cannot spend today otherwise you will outlive your money. But to be more factual you will also need to consider inflation. A modest 2% inflation rate will increase your needs to $1,305,600 by age 57 and you will need to earn 10.03% every year after your retirement on all moneys you’ve saved but aren’t spending to prevent you from outliving your money. And if you are more productive in life, and have over $5,250,000[xviii] that you are planning to pass on to the next generation, then you’ll need some serious consultation with a tax attorney and CPA along with your life insurance agent to minimize the amount that ends up in the coffers of the government instead of your designated beneficiaries.
Going back to the official publication of the American Council of Life Insurers:
“The voluntary termination rate of individual life insurance policies reached 6.8 percent [in] 2010. Of the individual life policies that have been voluntarily terminated, 21% were surrendered.”[xix]
This simply means that a majority of participating whole life insurance owners, the product which Dave Ramsey loves to “rant” against, are happy enough with the their purchase to keep them and keep paying the premium as well! Furthermore, they most likely understand that permanent whole life insurance is a product that, over time, has an ever decreasing cost to own. But even at that permanent whole life insurance becomes an even greater value, and rightfully so, to those whom the owner leaves as beneficiaries. Interestingly enough I have found that those who really value family and loved ones are the ones who really desire to own permanent whole life insurance, while many of those who don’t cherish these same values, mock it. Dave Ramsey’s last comment in his article, “Your spouse will just have to suffer through it if you die without insurance,” even though spoken in satire, addresses this observation of mine. Yet the real question is not if you die, but rather when you die! And even though I am the first to admit that term life insurance has its proper place, if you die after you stop paying the premium, there is no legacy left behind which the policy created. On the other hand, participating whole life insurance has its place too, and it shouldn’t be mocked or blighted because of an incomplete disclosure and discussion of the facts.
Money can never replace a life lost. Yet I have never delivered a death benefit where the beneficiary told me that I was delivering too much money. I appreciate Dave Ramsey for what he teaches concerning saving, living on what you make and keeping out of debt, all very sound and time proven principles. But his piecemeal discussion about permanent whole life insurance is dangerously misleading. Participating Whole Life insurance products are very sound products which are based on historical and actuarial data. They can consistently keep pace, if not outperform Ramsey’s paradigm of buying term and investing the difference when used for assisting the management of real costs found throughout ones’ lifetime. Remarkably, with a well-designed whole life policy, one can typically recover more than the cost of premiums paid within the first 7 to 15 years. That is a very short time in the financial world. But when the cash values in these policies are leveraged that typical 7-15 year period can be reduced significantly making the ownership of participating whole life insurance not only a tremendous asset but an unmatched financial tool in which those who love life and desire to accept full financial blessings should own and utilize.
To learn more, read my book Winning Your Financial GAME™ then call our office to setup a complimentary strategy session 1-866-502-2777.
[i] tdi.texas.gov/pubs/consumer/cb018.html, Texas Department of Insurance
[ii] 2011 Life Insurers Fact Book, pg. 64, American Council of Life Insurers
[iii] Dave Ramsey, The Truth About Life Insurance, daveramsey.com, October 25, 2010
[v] tdi.texas.gov/pubs/consumer/cb018.html, Texas Department of Insurance
[vi] Dave Ramsey, The Truth About Life Insurance, daveramsey.com, October 25, 2010
[vii] 20 year level term quote as of June, 2013
[viii] 2013 Dividend Scale Security Mutual Insurance, Kevin J. McKeown CPA CLU, ChFC Senior Vice President
[ix] Dividends Effect on Participating Whole Life Insurance, American United Life Insurance Company, page 4
[x] MassMutual Announces $1.39 Billion Record Dividend Payout for Policy owner’s, October 29, 2012
[xi] Dave Ramsey, The Truth About Life Insurance, daveramsey.com, October 25, 2010
[xii] Illustrations run with three major mutual life insurance carriers as of June, 2013
[xiii] Solving the Myth of Rate of Return, Fox Business, Erik Krom, April 30, 2012
[xiv] Thomas Young, Life Insurance will it pay when I die, pg. 69
[xv] Dave Ramsey, The Truth About Life Insurance, daveramsey.com, October 25, 2010
[xvii] Luke 12:19 paraphrased
[xviii] Forbes Personal Finance, After The Fiscal Cliff Deal: Estate and Gift Tax Explained: Deborah L. Jacobs, 1/2/2033
[xix] 2011 Life Insurers Fact Book, pg. 64, American Council of Life Insurers