Dave Ramsey on “Life Insurance”
Dave Ramsey has undoubtedly accomplished a great deal and assisted many with sound financial advice and a common sense approach to family financial matters. I feel confident in saying that he is absolutely 100 percent right about 99 percent of the time.
See for yourself what Dave has to say about life insurance in his own words on YouTube. According to Dave Ramsey, “Cash value life insurance is garbage, a rip off! Intelligent people will only buy term insurance and the only person whole life or universal life is good for is the agent who sells it in order to make obscene commissions!”
If he is right, those of us who provide life insurance products to our clients have a responsibility to do the right thing and protect them from being taken advantage of by unscrupulous insurance companies. As professional advisors, it is our duty to objectively analyze what is being said and let the “truth make us free.”
I’ll use Dave Ramsey’s own statements when answering this question from a viewer as an example: “Dave, many people have a long term need for life insurance. How can you recommend term for everyone?”
Dave gives the following “facts” in his reply to demonstrate the obvious advantages of using term life insurance and investing in mutual funds:
32-year-old father earining $40,000 per year
- Has two children ages 4 and 2
- Invests 15 percent of his income in his company 401(k) mutual funds
- Uses only a 15-year mortgage
- Buys $500,000 20-year term insurance for “nothing” — about $50.00 per month
20 years later, now at 52
- Both children grown, now 24 and 22, are gone
- By investing 15 percent of his income he now has around $500,000 -$700,000 in his mutual funds
- House is now paid for as well as everything else — no debts
- If he dies, let’s see: kids are gone, no debt, house paid for, wife has $500,000-$700,000
I think she could struggle by.
Sounds like logical advice when put that way, doesn’t it?
Now let’s ignore Dave’s comical sarcasm and think about this from the real world point of view:
1. Kids gone at 24 and 22. Really? How many parents do you know with a 24-year-old and a 22-year-old that are out of the picture? Is this unusual?
2. Investing 15 percent of annual income? Really? Think of all the people you know who are saving and investing 15 percent of their income. It is a well known fact: Americans are the worst savers in the world.
3. House paid off in 15 years? How many 52-years-olds do you know who are debt free and live in a paid off house? The data shows that most Americans have more debt at 52 than they had at 32.
Even if they were able to invest 15 percent of their income, they would need to earn 12.08 percent every year to have $500,000 and 14.52 percent every year to have $700,000. How likely is that?
Dalbar, Inc. results show for the 20 years ending Dec. 31, 2008, the S&P 500 Index averaged 8.35 percent a year — a pretty attractive historical return. The average equity fund investor earned a market return of only 1.87 percent.
It gets worse. According to Dalbar, the average share holder only earned 2.6 percent during that same period. And then there is the volatility of the market. Many people who had $500,000 in their mutual fund in 2007 were down to $300,000 in 2008, or worse.
Oops, I hope that wasn’t their year to retire. They need a 68 percent gain just to get even.
Those who did manage to save $500,000 would only be able to withdraw approximately $25,000 (taxable) a year and not run out. Of course anyone living at that level probably won’t have much worry about taxes.
Seems to me that Dave’s sarcasm is correct: If the average 32-year-old listens to Dave’s advice and dies at age 52, his wife will have to “struggle by somehow” — no joke.
The same 15 percent of a $40,000 income or $500 a month paid in for 20 years would get a healthy 32-year-old non-smoker a $650,000 death benefit indexed universal life policy that has averaged returns of over 8 percent for the past 20 years — with no stock market risk.
This same policy could produce a tax free $74,600 annual lifetime income at age 67 (full retirement age for those born 1960 and later). This is assuming an 8 percent average on the S&P Point to Point (according to John C. Bogle, the average from 1984-2002 was 12.2 percent). By the way, the average of 12 percent includes the downs. Indexed products receive a guaranteed minimum 2 percent to 3 percent in down years and as high as 15 percent in the up years. They capture the gains, but never participate in the losses — guaranteed.
All the drama of Dave sticking his finger down his throat when he talks about life insurance doesn’t change the fact that he is making outlandish claims about how much money a person saves or a person will have in the future if they invest in mutual funds. Investing in mutual funds contains risk.
This may have been the way to go back when a blindfolded chimp with a dart could pick a winner in the 1990s dot com era. But, that was a decade ago and it isn’t that way today. Dave is still touting outdated strategies which serve only to demonstrate that he, like the other financial entertainers, are 100 percent accurate at predicting the past. I would venture to say a little digging would probably unveil that Dave’s advertisers (the people he works for) want you in mutual funds, not insurance.
There should be a professional license requirement for anyone selling financial advice. However, since he is only an entertainer sharing opinions, he is free to say anything he wants.
I will continue putting my own money — and advising my clients to join me with a portion of their money — in products with guarantees, safety, liquidity, market indexed rates of return and unbeatable tax advantages.
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