Shopping Life Insurance? Dave Ramsey Says Avoid This Option
Unless you’re independently wealthy, the best way to ensure the financial security of your family in the event of your death is to buy a life insurance policy. The question is which kind of policy to buy. You typically have two main choices: term life insurance and whole life insurance. Both have their pros and cons, but in almost all cases financial experts recommend term life over whole life — and it’s not even close.
According to a recent post on the website of financial guru Dave Ramsey, it’s “far better” to get term life than whole life.”
“We don’t want you to get ripped off, we do want to see your family well protected, and we for sure want your financial future to include wealth and the chance to become self-insured,” the post said. “The only kind of policy that lets you hit all those goals is term life. But whole life misses the mark in every department.”
Ramsey isn’t the only one who feels that way. Many other financial experts say that with few exceptions, term life is better than whole life because of the amount of money involved.
In case you need a primer: Term life insurance insures you for a specific amount of time, such as 20 years. When that term is up, the life insurance policy ends. If you die during the specified term, then your family is covered and will receive either a one-time payment, annuity or monthly payment.
Whole life insurance, also known as cash value insurance, refers to coverage that lasts your whole life, no matter how long. These kinds of policies work like investments that let you build up savings over time. Because of this added benefit, whole life insurance costs more than term life — and the difference can be significant.
An analysis from Forbes conducted late last year compared rates for a 40-year term life policy from Legal & General (the longest available at the time) and a whole life policy from American National. Here’s what it found:
- A 30-year-old healthy, non-smoking male would pay about 5.8 times more for a $500,000 whole life policy vs. a $500,000 40-year term life policy.
- A 30-year-old female would pay about 6.7 times more.
A similar analysis from Ramsey Solutions compared the costs for a man in his 30s who wants to get $250,000 of life insurance for his family. One option would be a whole life policy that costs $260 a month and includes the insurance coverage as well as a chance to build up savings for retirement. Another option is to get a 20-year term with $250,000 of coverage for about $13 per month, or a $247 monthly difference compared to whole life.
Theoretically, the much more expensive whole-life premium goes toward a cash-value investment. But as Ramsey Solutions noted, much of the additional $247 per month “disappears into commissions and expenses for the first three years.” After that, the cash value portion will offer a rate of return as low as 1% to 3%.
If the man lives long enough to amass $180,000 or more in cash value with the whole life policy and doesn’t cash it out before he dies, the insurance company keeps that money in the event of his death. The insurer will pay out only the $250,000 covered in the policy.
The sole advantage Ramsey sees in a whole life insurance policy is that it’s “better than no life insurance at all.” The cons include not just the cost over the life of the policy, but also the fact that whole life insurance tries to do two financial jobs at once — insurance and investing — “but ends up doing neither well.”
Another disadvantage is that permanent life insurance coverage is not usually needed because at some point, people build up enough wealth to “self-insure,” Motley Fool’s The Ascent reported. You also face strict rules for when and how the money in a whole life policy can be accessed.
A blog on the Aflac website takes a more neutral view, stating that when it comes to term life and whole life, “one isn’t necessarily better than the other, but one can be more suited for your unique needs.”
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Aflac recommends taking a closer look at the costs and deciding how much you’re willing (and able) to spend on a policy. You should also consider how many people you need to support and determine if there is a better investment option beyond whole life.
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