If you’ve ever listened to Dave Ramsey’s radio show or seen him on TV or read any of his books or articles, you know one thing about Dave: He doesn’t mince words. So when he says in an article entitled "The Truth About Life Insurance" that "Cash value life insurance is one of the worst financial products available," you’re probably not surprised that he feels strongly about it.
But why does Ramsey feel so strongly that cash value life insurance, also known as permanent life insurance, is such a bad idea for most Americans? And why does Ramsey believe strongly that term life insurance is the best way for people to protect their families?
We’re going to go over the three big reasons that Dave Ramsey believes that term life insurance is a much better product that cash value life insurance, and by the end of it, you won’t be mincing words, either.
1. Dave Ramsey believes that cash value life insurance is misleading
Let’s start with the number one thing Dave Ramsey wants you to know about cash value life insurance: It’s not going to help you "retire wealthy." What an agent or advisor might tell you is that cash value life insurance policies will help protect you during your younger years and give you a nest egg for your retirement. How? As Ramsey puts it, "A cash value policy is an insurance product that packages insurance and savings together." That savings component is called the cash value.
According to Ramsey, an agent might show you a great projection for what that cash value could be in thirty years, but you shouldn’t believe them. Ramsey states that "none of these policies perform as projected," and while that is hyperbole, it’s not far from the truth.
The thing about those projections is that they often get mixed up with something called the "guaranteed minimum." When you’re dealing with a cash value product like whole life insurance, you usually have a guaranteed minimum growth set in your contract. But that’s completely different – and usually much lower – than the projections the agent might show you! While it’s totally possible that your policy hits those projections, there’s nothing that states it has to, and it’s important to understand the difference.
2. Dave Ramsey knows that you won’t need life insurance when you’re retired
One of the arguments for cash value life insurance is that it lasts your whole life (hence "whole life insurance" and "permanent life insurance"). But what your advisor might not tell you is that you actually don’t need life insurance after a certain age. Dave Ramsey says it best in this video:
Basically, Ramsey is saying that if you follow a solid financial plan and pay off your debts, save for retirement, and send your kids off to college, you don’t need life insurance after you’ve hit those goals. As Ramsey writes on his blog, "That means when your 20-year term is up, you shouldn’t need 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."
There’s a reason that we say that life insurance is a back-up plan for your financial plan – it’s Plan B, not Plan A. Term life insurance is specifically designed to be a cheap product that will provide for your family if you don’t live long enough to pay off your debts and put aside a nest egg. If you don’t have any debts and you have enough saved for retirement, why would you need life insurance?
Term life insurance lasts for the specific period of time you buy it for (coincidentally called the "term"), and then it ends. You stop paying for it because you don’t need it anymore. End of story.
3. Dave Ramsey believes in buying term and investing the difference
If you’re planning the future, you’re probably already investing, whether it’s in a company 401(k) or your own investment accounts. Cash value life insurance may seem like a win-win: get life insurance and a retirement plan in one package. But as we already mentioned above, cash value life insurance doesn’t grow at the rates you think it will, and putting the money that you would spend on this expensive product into an investment account instead would be much more beneficial in the long run.
You don’t even necessarily have to invest, as Ramsey writes: "The truth is that you would be better off to get the... term policy and put the extra [money you’re not spending on cash value insurance] in a cookie jar! At least after three years you would have $3,000, and when you died your family would get your savings."
Still not feeling a fire in your belly about term life insurance? Check out this "heated debate" between Ramsey and a whole life insurance agent who called into his show. (To call it a "heated debate" is a bit of an understatement, in my assessment.)