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.
br /> 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
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.
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?
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.beshe 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.
*While we make every effort to keep our site updated, please be aware that “timely” information on this page, such as quote estimates, or pertinent details about companies, may only be accurate as of its last edit day. Huntley Wealth & Insurance Services and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.
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