5 Reasons Dave Ramsey & Suze Orman are Right – Term is Best
Today I want to talk
about a topic that many folks prefer not to talk about but when it comes to
financial peace and prospertity it is a very important topic. Any of you that
are following my ProsperityRx podcast know, I try to stick to topics that relate
to what I call, your prescription for prosperity.
Today I want to touch on
the topic of Life Insurance. Now right off I want to say that I am not
currently a licensed insurance agent nor do I hold current securities and
exchanges registrations so I have absolutely no financial interest in the topic
beyond my interest in helping my followers reach their financial peace goals
through these prescriptions for prosperity.
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I’m not going to talk
about the obvious reasons as to why someone should have life insurance as part
of their financial plan but what I do want to talk about is something that I am
very passionate about and something that, when I represented Prudential
insurance was a contentious topic. The reason it was such a contentious topic
to me is I just could not justify, no matter how I looked at it, I just
could not justify putting a very lucrative commission from selling Universal or
Whole life insurance ahead of the interest of my clients. I could sell
them a term insurance policy and then help them invest the difference in mutual
funds.
So today I want to talk
about why Term Insurance is by far the best option for meeting your family
obligations. And why you should invest the difference in either debt reduction
or investing the difference for your future financial needs.
Both Dave Ramsey
and Suze Orman say you should only buy term insurance.
They say that permanent insurance policies like whole life insurance are a bad
investment. Because money you don’t spend on the wrong insurance policy is money
you can save and use elsewhere!
So on this podcast I
will explain the difference between term and whole life insurance and the 5
reasons Ramsey and Orman say term life insurance is best. But first,
Term vs. Whole Life Insurance: What’s the
Difference?
Here are some of the key differences between term and whole life
insurance policies.
Whole Life Insurance
·
Offers guaranteed lifetime
coverage if all premiums are paid
·
10x to 20x the cost of term
insurance
·
Has a “cash value” /
investment component which depending on the terms of the policy may be
available for loan/withdrawal
Term Life Insurance
·
Coverage for a set length of
time. 10, 20, 30 years
·
Premium payments general fixed
for a specific length of time
·
Generally 5-10% of the cost of
whole life insurance
·
If premiums aren’t paid the
policy lapses (cancels)
Remember that whole life insurance is not the only type of
“permanent” or “lifetime” insurance.
Here is the first of 5 reasons Dave Ramsey and Suze Orman will
tell you to buy level term life insurance.
#1 – Term Life Insurance is Cheaper than
Permanent Insurance
Term life insurance is a lot less expensive to buy than
a permanent policy. Typically only 5-10% of the cost of whole
life.
Dave Ramsey says that if a 30
year old male had a $100 a month to spend on life insurance, he could
only afford to purchase a $125,000 whole life insurance policy.
That’s because it’s “permanent life insurance.”
What's that mean, permanent life insurance?
It means it’s designed to last to age 100 or longer, and typically
includes a cash value component to it, meaning if you cancel at some point, you
may get cash back that’s building up in the policy whereas term doesn’t return
your premium.
So Why is that important?
To get the same amount of coverage on a term life insurance
policy, it would only cost him about $7.00 per month. That would
leave him a $93.00 or ($1,116.00 per year) that he could apply toward his debt
snowball, to invest or save in some other format.
Sample Term vs. Whole Life Insurance Quotes
$500,000 Death Benefir
Age
30 Y/O 30
Year Term : $390 Whole Life: $5476
40 Y/O 30
Year Term : $618 Whole Life: $8006
50 Y/O 30
Year Term : $1,555 Whole
Life: $12,726
60 Y/O 20
Year Term : $2,417 Whole
Life: $20,726
70 Y/O 15
Year Term : $5,260 Whole
Life: $35,166
*Sample quotes above are for a male in preferred
health, non-tobacco, and are not to be construed as an offer for insurance.
Prices are subject to change.
The “Dave Ramsey Life Insurance Stance” is Very Bold
In the show notes I will share a link to a video from The Dave
Ramsey Show where a fan asked Dave why he recommends term, and what’s the
difference between term and whole life.
A couple notable quotes from this video are:
- “Term doesn’t have any gimmicks
or bells or whistles that has an investment built into it.”
- “The lifetime ROI on whole life
is around 1% like your stupid savings account at the bank. No one
builds wealth at 1%.”
- “Whole life
is the payday lender of the middle class.”
Does Suze Orman Agree?
She is
also of the opinion that permanent life insurance is way over
priced when it comes to the actual value you receive for the money that you
invest in life insurance.
She also believes that it would be much more advantageous to invest
the difference between what you would spend for term insurance versus
what it cost to buy a permanent policy such as whole life or universal life.
Bottom Line:
The Suze Orman Life believes that everyone should buy term!
#2 – As Art Williams always said, “Buy Term and
Invest the Difference”
Both Dave Ramsey and Suze Orman say that the money you save on a
term policy can be better invested elsewhere and earn you a
higher rate of investment.
Most whole life policies won’t even break even for the first 7 to 10 years, and Dave Ramsey says
that the average rate of return on a whole life policy is just 2.6%.
On a universal life policy, the average rate of return is 4.2%, and on a variable life
insurance policy, the average rate of return is 7.4%.
On the other hand, the average rate of return on the same mutual
funds which you can invest in outside of a permanent policy, according to the Consumer
Federation of America is 12%.
So, do you think you can out earn 2.6% in the stock market?
Probably!
What's Suze's Take on Term vs. Whole Life Insurance
Like Dave Ramsey’s life insurance views, Orman gets super upset and
animated even at the question if you should buy term or whole life.
On a recent episode of Suze Orman's show https://www.youtube.com/watch?v=AIdG7cwHo04&feature=youtu.be
she had a discussion with a 39 year old man who recently bought a 1 million
whole life policy, about what he should do instead. She suggested that he
should cancel the 1M whole life policy he bought for his wife. Since it costs
10x as much as term, over 30 years, they could take the $900 savings and
probably invest it to make $1 million in their own investments
#3 – What Type of Life Insurance Do You Really Need?
Having spoken about the rate of return of the “investment” in
whole life and universal life, you might be thinking that the “return” is not
important to you because you need lifetime coverage.
Here’s what I say to that… Very few people actually
need permanent coverage.
If you are prudently planning for the future, that is paying
down your debts and investing for the future, most Americans ages 20 to 50
won’t need coverage 20-30 years down the line.
Dave Ramsey argues https://youtu.be/gvjir8yxPUI
:
·
no one needs anything other
than term
·
if you’re paying off debt
(including using a 15 year mortgage) and investing 15% of your income, you’ll
have plenty of savings and have no mortgage when your term ends, so it’s ok
when your term expires.
Because not everyone
gets out of debt, invests 15% of their income or gets a 15 year mortgage I
suggest to maybe Buy 2 Policies Instead of One, and Stagger the Term
Lengths – Most agents will try to sell you one big policy with a long term
length like 20 or 30 years. But why pay for a full 20-30 years of
coverage for the full amount if you don’t need it that long? You can
save 10-20% by buying 2 policies totaling the same amount of coverage, one with
a shorter term to maybe cover your mortgage and one with a longer term.
If you plan prudently for your future, you won’t need as much coverage in
10-15 years, so let the first policy drop off.
#4 – Permanent Life Insurance Policies Have
High Up-Front Expenses
Both Dave Ramsey and Suze Orman also point that it takes several
years before you even begin to reap any benefits from a permanent life
insurance policy.
This is also true because the entire first year of
premiums that you spend on a permanent policy goes to the insurance agent who
sold you the policy as commission.
Good for the agent … bad for you!
According to Dave Ramsey, it can take up to another 2
years of premium payment to account for all the additional expenses.
If you take our earlier example of the savings you would get from
a permanent policy by opting for a term policy instead and saved $93.00 per
month, which works out to $3,348.00 over that 3 years, you could have
saved that money and invested elsewhere.
#5 – Permanent Insurance is Misleading
One of the other irritating things about permanent insurance
according to both Dave Ramsey and Suze Orman is that the cash value
accumulation feature is somewhat misleading. If you buy a $250,000 permanent
life insurance policy then that is what your beneficiaries would get when you
die.
People get this wrong:
Some people are mistakenly under the impression that you get the
face value of the policy PLUS the cash value accumulation feature. This is not
the case as both the death benefits and the cash value accumulation feature
are joined together for a total of $250,000 and not a cent more.
With all the fees, loans, paid up additions, dividends that make
up life insurance, it’s confusing.
If Warren Buffett doesn’t invest in anything he doesn’t understand,
you probably shouldn’t either.
When talking to another caller on her show https://youtu.be/6vnN9liFWaE, Suze
Orman shows a 39 year old man who recently bought a 1 million whole life
policy, an insurance agent “friend” pitched him the whole life policy, she
discussed what he should do instead.
- Suze reveals just how much
commission his “friend” stands to make off his policy purchase
- What he
should do with the money instead
One observation I’d like to add to Suze’s analysis (from a life
insurance agent’s perspective) is that just because a broker stands to make a
lot of money off a policy, that in and of itself doesn’t make whole life “bad.”
Whole vs Term Life Case Study: Is Whole
Life Really a Bad Investment?
Let’s see a typical quotes for term and whole life, and
extrapolates out the investment earnings on the whole life side for 20 to 30
years, and compares that to the “buy term and invest the difference” strategy
of Art Williams, which is also the Suze Orman and Dave Ramsey life insurance
approach.
Take a 40 year old male in great health looking for $500,000.
Here are his whole and term life quotes (annually):
Annual 30 year Term Premium: $609
Annual Whole Life Premium: $8,006
Annual Savings: $7,397
Lets see what happens if you invest the savings of $7,397 at 7.5% every
year for 30 years
By purchasing term life insurance instead of whole like insurance
and investing the annual savings $7,397 at 7.5% you would have invested
$221,910 and the investment would grow to $829,606 in 30 years,
As you can see, buying term saves him $7,397 per year.
Lets look at it another way.
Cost of the whole life policy premiums over 30 years: $240,180.
Cash value at 30 years. $487,090.
That’s a difference of $246,910
The cost of the term insurance over 30 years: $18,270 plus the
amount you had invested because you invested the difference. $221,910. That’s the
same total cost of $240,180.
Value of investment would be $829,505 that’s $342,516 more than
the Whole Life plan
If you took that savings and invested it, earning 7.5% average
return per year, you’ll make an extra $342,516 OVER and beyond the cash value
that you’d have in your whole life policy. Plus with the whole life policy if
you passed away, all your family would get during that time is the $500,000
Death benefit, they dnt get the cash value. With the term insurance they would
get the $500,000 life insurance PLUS whatever amount has accumulated in your
investment.
Note, this is only for illustrative purposes, and there are some
nifty things you can do with your whole life policy during its life, like
borrow from it, or use the dividends to pay your premiums, which any dividend
used to pay the police reduces the cash value and any loan is deducted from the
cash value but you should still get the point.
If you’re comparing term vs whole life insurance, you’ll want to
talk to an independent insurance agent. They can access and research
dozens of companies so you are assured they will find the best policy at the
most affordable rates. If you have health concerns, don’t let that dissuade you
because they can give you valuable advice and help you to find a policy that
suits you.
Folks this has been
another episode of the ProsperityRx podcast where we share with you your
Prescription for prosperity.
Now is the best time to
start taking control of your Life! As a loyal listener I’ve put together a free
course for you that will walk you through the steps of setting up and following
a spending plan so your family can also get on the road of financial peace and
prosperity. To get it absolutely free visit SpendingPlanClass.com
If you enjoyed this
episode I hope you like and share it. In future episodes I’ll be covering many
topics to teach you how to improve and take control of your health as well as topics
that encourage saving and debt freedom.
After all what good
is your wealth if you have poor health?
What good is your health
if you have no wealth?
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He guys I hope you enjoyed this behind
the scenes look at recording my podcast. My goal is to post a podcast at least
once a week. So far it has been primarily focused on the financial aspects of
living a prosperous life but I will also through in some posts from time to
time about health and wellness. Its something I really enjoy doing and I’m
sharing information that I am passionate about. I draw from my own personal
experiences and my life time of working in marketing, experiences from my time
in the financial services industry, my experiences as a pharmacist and sharing
what I have learned about how nutrition affects our overall wellbeing, and
finally what I learned when I spent one weekend a month travelling to meet some
of the top income earning folks that I could find, learning about what it was
that they did to reach the level of prosperity that they enjoyed. Bottom line I
just want to share with folks how they can live better.
And just for you guys here on facebook
I would like to share with you a report that I found as I researched this topic
titled “Is Whole Life Insurance Worth It? If you would like a free copy send me
a private message and I will send it right over to you. Just click on the
private message link here on facebook and send me a note. I’ll get that report
right to you.
And thanks again for tunining in and
commenting. I really appreciate it.
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