I respect Dave Ramsey. He has done a lot of good things helping people manage the debt monster. However, like many radio and TV personalities, he has to take some controversial positions to stir the pot. His position on life insurance is one such position he is just wrong about.
Dave’s position, as I understand it, is the only life insurance you should ever buy is term insurance. The idea is it covers the need for insurance while you focus on paying down debt and growing assets. He claims if you follow his system you will not need life insurance later in life. I think a simpler way to say this is buy term and invest the rest.
I submit that buying permanent insurance that builds cash value is a better approach for many people.
Here is an example of using life insurance throughout a person’s lifetime. What is described below is real although perhaps not your everyday situation. It does illustrate the many advantages of cash value permanent life insurance.
We have a newborn where the parent or grandparent has funded through gifts of $13,000 a year for 17 years!
That’s IT! Never paid a nickel more in premium, loan interest, loan repayments etc.!
We used a MassMutual 20 Pay Whole Life contract, but elected Reduced Paid Up (RPU) Insurance after the 17 years of payments. Total payments into the policy equal $221,000.
At age 18, the policy owners withdrew $30,000 a year for college tuition for 4 years. This is $120,000 of cash withdrawals from the policy.
At age 30, a onetime withdrawal of $50,000 is made for a down payment on a house.
For the next 36 years, the policy stays in force and builds cash value based on the guaranteed interest and non-guaranteed dividends paid into the policy.
At age 66, the insured starts a retirement income stream of $250,557 per year for 20 years. This results in total retirement withdrawals of $5,011,140.
At age 85 the insured stops the income stream. The owner still has $1,516,025 of net cash value and a net death benefit of $4,191,146.
You don’t have to be a math whiz to realize that the owner paid $221,000 into the policy, and withdrew $5,191,000, without depleting the cash value. The policy is still in force and has cash and death benefit left at age 85.
So what would this look like if the owner took the same $221,000 of the premium and invested in a moderate mutual fund that compounded at 5% for 50 years? it would grow to $2,534,295). This of course also means you had no access to the money for those important college and housing expenditures.
To be fair the interest is guaranteed in a whole life policy and the dividends are not, so it is theoretically possible that the growth will not be this robust. The dividends can fluctuate more than this illustration shows. The return on the alternative is also not certain over time.
Don’t have $13,000 for $17 years? How about $1,000 or $5,000 for 10 years? The concept works.