Is Whole Life Insurance a rip off?
A response to Dave Ramsey.
For this blog, we are responding to a clip from the Dave Ramsey Show. We recommend you watch our video and Dave’s for the full effect. Below we have the transcribed points.
Dave talks about just getting an 11% return every year for 70 years as a solution – so yeah, just become one of the greatest investors in the world and you’ll outperform a conservative life insurance policy. Needless this is very silly and is not an equal comparison in any sense. If any investment advisor ran illustrations showing you are going to receive an 11% return every year for 70 years, they would lose their license.
He is using a trick here because what he means is the market had an average return of 11% over that period. What he does not say is that includes years where it’s up 20% and down 30% and back up 18% and back down 12%. Over time it evens out, but if you need to use your money in a year where the market is down 20%, you’ll find out really quickly that actual returns and average returns are 2 vastly different things.
The caller talks about putting $70,000 total into the insurance policy and Dave magically turns this into $25 million worth of mutual funds – this is a ridiculous and totally unrealistic return. This guy would have to get 350 times return on his money. Good luck.
Biased View of Mutual Funds
He also talks about this person is going to end up with a portfolio of $25 million in mutual funds – this again is very unrealistic – I can guarantee you that anyone who has a $25 million portfolio does not have that $25 million in mutual funds. If they had that type of amount of money, they would be buying the underlying stocks directly.
If you are going to compare “investments” then it should be apples to apples – the participating account of a whole life insurance policy is very conservatively invested and contains a large amount of government and corporate bonds. So, it could be compared to a fixed income portfolio. But the dividends and growth in a life insurance policy are immediately vested and guaranteed, so you would have to make the comparison to an investment that comes with guarantees.
He talks about leveraging the life insurance policy and says that someone with a large portfolio can leverage so you don’t need the life insurance. This is technically true but also leaves out a very important detail about loan to value – LTV
With a life insurance policy you can get an 80 or 90 or even a 100% loan to value. For example you have $100,000 in your life insurance and the bank will give you $100,000.
There’s no way a bank is giving you 100% loan to value on a stock portfolio. Those are usually at 50% or 65% depending on what you’re invested in. Or you could hold cash or GICs where they potentially could give you 100% but even then, probably not unless you are a great client.
He says you are overpaying for the whole life insurance – no, the insurance price is different than term because it is a different product. The risk to the insurance company is different because whole life is guaranteed to pay out one day regardless of how old you are, vs term will only pay out if you pass away during the term of the insurance
If any insurance company was charging way too much for their insurance, the competition would take all the business by charging a better price.
The additional cash that you put in is not overpaying, it is literally putting more money straight into the cash values – this grows your cash value and death benefit.
The Value of Whole Life
Here Dave talks about the cash value of whole life insurance.
He said that you lose the cash value when you die. This might be different in the US, but this is totally incorrect for Canadian policies. The death benefit includes the cash values here in Canada.
He calls Whole Life Insurance a rip-off in this clip.
Oh yea, Whole life insurance is a such a rip-off – it’s been around for 175 years and is offered by some of the largest and most conservative and highly regulated companies in the country. How has this scam been running for 175 years and has its own tax code, yet no one has caught on except Dave Ramsey?
He is dealing in absolutes – never buy whole life is not good advice. There are definitely times that whole life is needed and it is the right tool for the job. And there are definitely times where whole life doesn’t make sense.
There aren’t really any absolutes in the financial world except for maybe don’t bury yourself in expensive consumer debt. Try to stay away from financial people who deal in absolutes where you can only do 1 thing, or this other thing is always bad.
Whole life insurance has been around in Canada for 175 years and is supplied by some of the most conservative companies in the country and super highly regulated by every single province and the federal government.
His argument also doesn’t consider people who have legitimate estate needs and need to guarantee the insurance is there when they pass. This includes people with assets like real estate, businesses or large share portfolios.
When they die, there is a big taxable disposition that the estate needs to pay.
If the beneficiaries want to keep the asset, someone must pay the taxes, and one of the cheapest and guaranteed ways is using life insurance.
Contact & More Info
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