Is Whole Life Insurance a Ripoff or the Right Financial Tool: The Dave Ramsey, Suze Orman Rant

Suze Orman Life Insurance, Dave Ramsey Life Insurance, Whole or Term Life Insurance
Is Whole Life Insurance an Investment? We don’t see it that way nor does the State of Michigan. Find out why.

Well, this one tends to fuel a lot of hoopla these days. Financial advisor gurus, Dave Ramsey and Suze Orman say you should only buy guaranteed level term life insurance.

They have purported that permanent insurance policies like whole life insurance are a bad investment.  Buy term life insurance they say.  Whole life insurance has even been called a ripoff!!

Are they right?

Suze Orman Life Insurance – The One Trick Pony, Term Life Coverage?

Take a look at the example video posted below.  The Suze Orman life insurance recommendation seems a little over confident with the little information gathered from the policy owner.  This gentleman and wife received questionable advice from 2 people.  First, the writing agent and second, Suze Orman.

A single 30 year term for a 39 year old that is a stay at home father?  How long has he had the policy?  What are the goals?  Whole life insurance on the wife?  Why was that selected in the first place?

Those questions must be asked to assess the situation.  The odds are, both of these people probably were sold the wrong products, but Suze did not really smoke that out.  She just jumped all over the cost of whole life insurance which may not have been appropriate for multiple reasons other than the cost.

This is why you talk to an life insurance expert, not a guru.  Planning with life insurance is not always cut and dry.  A blending strategy may necessary depending on the family structure and goals, who knows.  Talk it out with your professional, not a financial entertainer folks.

The big problem is the assumption that everyone subscribes to these same ideologies or will invest the money in the first place.  It also assumes everyone at this stage in life has an identical family situation.  Can we really take for granted that the market won’t crash like it did in the mid 2000’s?

So should I just buy whole life or term insurance than?

Honestly, there is not one clear answer to that question, period.  When you hear the rants of various financial gurus vs “hardcore” whole life insurance agents battling, you’d think people would come to the reasoning that the answer lies somewhere in the middle.

So for my “rant…”

In short… I will say, it depends.

Some people are just not comfortable picking and/or monitoring investments and as such are risk adverse.  If you are risk adverse should you invest the money anyway?  After all, the gurus say this is what everyone should be doing, right?

The reality is, plenty of people will continue to be uncomfortable with investments they don’t understand.  It is not reasonable to expect them to start investing.  These opinions are based on their personal knowledge and fear of the market and its risks.

Whole Life Insurance A Bad Investment?

Let’s clear this up right away.  Whole Life insurance is not an investment, period.  It is a permanent life insurance policy that guarantees financial protection for the rest of your life.  It will pay out inevitably as long as the policy is paid up properly.  It has the same premium from the age you take it out to the day it is either “paid up” or you pass away.  Keep it for 50 years and you will see why it wasn’t so expensive when you try to buy term life insurance at age 70.  It is priced to be permanent, not temporary.

In the earlier years of coverage, it is very expensive for whole life coverage compared to term life insurance.  Try taking a term life insurance policy out 20-30 more years in the future for the same amount and you will see why the whole life policy was priced as such such.  The same amount of coverage will be a lot more money, period.

Remember, with whole life, the premium will never go up and the death benefit will never go down as long as you keep the policy paid up.

Whole Life insurance is designed for wealth transfer for the most part. It is the original estate planning tool of choice in a lot of cases where guaranteed universal life insurance does not meet the the policy owner goals.  This is a strategy used quite often by the wealthy.

So why isn’t whole life insurance an investment?

Simple.

What do investments imply?  That’s right… risk of loss.  Whole life insurance, none.  That is why they call it insurance.

Yes, there is of course VUL (variable universal life), but that is a different animal all together and infrequently sold.

Most people just need term insurance or permanent life coverage offered by a guaranteed universal life insurance (GUL) policy.  No cash value inherent (some GUL policies have small amounts) in these policies, just pure insurance protection.

Whole life insurance is very good for small final expense, burial policies, money leveraging strategies or estate tax scenarios, but term life and GUL handle everything else with some minor exceptions.

I don’t have a problem with anyone expressing their opinions about smart money (I just did it myself), just be sure that you have written a lot of life insurance coverage for all ages, worked for the carriers or have something other than hearsay or horror stories before before claiming to be an expert on life insurance.  Listen to people and get to the root of what they really want and can afford. Don’t confuse the public with life insurance drama.  I can tell you about plenty of people who had their term life insurance expire at the wrong time and plenty who lost their shirt in the stock market in 2008.

Dave Ramsey Whole Life vs Term Insurance

Dave comes at whole life insurance with an apparent attitude.  He believes/markets that you can easily build up financial resources by investing the difference saved in buying term life insurance vs whole life insurance.  The difference is placed in the market and you anticipate an 7-8% a year return.

You know, it can work.

Problem is…there is NO guarantee at all.  What happens if 2008 strikes again?  Many people lost 50% of their mutual fund growth as they naturally got scared and pulled it all out.  We’re they stupid?  No, just human and feared losing it all.

How many people lost money on their whole life insurance policy…zero!!

Did the cash value increase, yup.

Is it an investment, no!!

Many people have died with their whole life policy in force since 2008 and it has paid out way beyond the amount of premium put in their policies.  It was completely unaffected by the market.

Their beneficiary received tax free money too boot!!

The Take Home…

Dave Ramsey’s reasoning makes a lot of sense.

But…

Life insurance is a guarantee not an investment.  That “investment” argument is getting old and ridiculous.  Cash value accumulation is a benefit of certain types of life insurance and one reason why those policies are more expensive.

Remember folks, Dave is a sponsored financial entertainer.  While knowledgeable he is not a licensed professional and does not have any certification in life insurance.

He is just aggressively marketing his opinions.  He sends his term life business to a big box term life insurance agency called Zander Insurance.

Curious?  Why not just recommend an independent life insurance agency of his listeners choosing?

Are you sure you are really getting unbiased advice there?

The Real Intent of Whole Life Insurance and Other Permanent Life Insurance

The difference between investments and life insurance, Whole Life Insurance is a guaranteed financial vehicle.  There is no risk or loss element as long as you pay the appropriate premiums.  Benefits never go down and the cash value accumulates…regardless of what goes on in world.  There are guaranteed rates of return built in the policy.  These policies are not meant to compete with mutual funds or the like.

With whole life insurance, you are paying for a lifetime of guaranteed protection for the insureds life…the financial value of it.  With term life insurance, it is temporary.

Though I do personally invest, I do not advocate it for everyone.  It takes a certain level of nerve to withstand tough times…especially are when the market is really down.  Investing should be kept separate from Life Insurance from our perspective here at Special Risk Life.

When I first became a licensed agent about 20 years ago, Michigan law prohibited any licensed life insurance agent from even claiming life insurance was an investment.

Wonder why?

The state did not consider that to be a fair statement and a misrepresentation to the consumer.

Whole life insurance is not exposing you to inherent risk as your typical investments do.  Cash value of a whole life insurance policy is a benefit.  Again, there are guarantees built into it.  Some people may chose to borrow funds from their policy, use it elsewhere and repay the policy loan later.  Comparing this to a mutual fund or a stock just seems kind of ridiculous.  Life insurance is just part of a financial protection strategy.

Some people deploy a cash value, whole life insurance policy, and some don’t.

As an independent life insurance agent and not a Certified Financial Planner (CFP), it is simply not my place to talk investments.

Whole Life Insurance provides a lifetime of security.
Whole Life Insurance is financial protection for the living. Like term life insurance, there is no risk.

Life Insurance is financial protection for the living folks.  The level of protection needed costs a certain amount of premium.   It is insuring the inherent financial value of the insured person’s life to a beneficiary(s).  It isn’t really an investment.

The term “investment” implies varying levels of financial risk in most cases.  Traditional life insurance has limited “risk” if the policy is properly paid up, whether we are talking about Whole Life or Term Life Insurance.

Incidentally…Having both permanent coverage plus cash accumulation… of course it is going to cost a lot more.   After all, Whole Life Insurance will be paying out a large sum of money to your beneficiary assuming the policies are kept in force.  Term Life insurance may expire long before the insureds death.  Hence, a much lower risk of a claim being filed with the insurer and lower costs to the paying party.

Even 10 times as much!!

So, if you indeed kept your permanent life insurance coverage, the policy is going to be paying out a lot of money to your loved ones at some point, right?  Term Life insurance stacks the odds in the insurance companies favor and why it is much cheaper.  It’s simply temporary coverage for the insured individual and no cash value accumulation.  The odds of payout are greatly reduced, especially if you or another insured are in ideal health.

It wasn’t that long ago the most investments bottomed out. While it has certainly turned around a lot of people lost big money.  How many years did that market recovery take?  The general public who had invested their savings money came into the reality that investing for years does not guarantee anything.  You could be up over many years and down all of it in short order if market conditions go south.

Yes, our market did recover, but investor recoup did not occur quickly did it?  The recovery required you either held your course thru it all or bought new investments at the bottom to offset all the losses.

Pretty easy to put a million in your pocket after 30 years of investing, right?  Yea, no problem.

Sorry, I am being sarcastic here.

Again, investments and life insurance should not be commingled.  Investments do not inherently protect your loved ones.  The intent is to grow your money but assumes you understand there is a degree of risk in doing that.  People buy life insurance to transfer risk, not assume risk.

Here is the rest of reality when it comes to Term Life versus Whole Life… With age, risk to the insurer goes up.  Someone age 25 taking a policy out for 20 years is pretty likely to survive right?  We all know exceptions to that rule, don’t we?

Anyway, as we get into our midlife and senior years, risk to the life insurance company goes up exponentially.

What Are the Alternatives To Whole Life or Term Life Insurance?

At Special Risk Life, we do not advocate Whole Life Insurance or traditional Universal Life Insurance as any kind of investment.  Keep your investing over on one side of your portfolio and life insurance on the other.  Life insurance (term or permanent life insurance) is not a one size fits all.  None of these products are the best choice for everyone, period.  Some policies will have additional benefits and will cost more…maybe a lot more depending on your wants and needs.

Permanent Insurance (Whole Life Insurance or Universal Life Insurance) is typically used for certain applications:  First and foremost are those who are just risk adverse and just want permanent, life long protection for their beneficiary(s), those  individuals “leveraging” a large sum of money, estate planning, funding a life insurance trust, charitable giving, pension maximization, final expenses, burial or funeral expense insurance.

Don’t get sucked into a one product fits all mentality.  If your a 25 year old with a new mortgage and just starting a family and striving to get financial protection in place, consider a blending strategy of 30 years of level term life insurance on each of you.  It will save you a lot of money in premiums.

The strategy of blending policies is a bit beyond the scope of is article, sorry!!  Protect your family by getting something very, very affordable.  The blending strategy is cheaper than buying a 30 year term policy.  If you are comfortable, take what you can afford and invest it.  That is just a typical recommendation if your means are limited and just not sure about the need for permanent coverage.

As your wealth increases and kids move on, you may not have the need for the extra life insurance any longer.  That is where the blending strategy works well to save you money.  Just depends on your specific situation.

I do believe that whole life insurance seems to be getting less purposeful than it was years ago.   There are newer universal life insurance products that are more cost effective and provide permanent coverage at a considerably lower rate than Whole Life Insurance.  Mentioned earlier, Guaranteed Universal Life can be very affordable and useful in traditional cases and provide “term like” rates.  It tends to be a go to product for estate preservation cases, charitable giving, pension maximization planning etc. now days.

If permanent coverage and/or cash value is important to you, let us know.  That takes term life insurance off the table completely as it is not permanent life insurance coverage.   Knowing your goals helps us zero in on the right products and company(s) for you.

The takeaway here –

Hopefully you have a better understanding of why certain permanent products do cost a lot more for the same amount of coverage.  Maybe those who do not want or need permanent coverage consider it a ripoff.  Again, it is about values first and foremost.

As stated previously, I do believe there are newer permanent products that are starting to make Whole Life “feel” outdated, but there are still benefits in a good participating whole life policy that are worthwhile to the right person.  The key to a permanent policy and its value…you must die while the policy is in force.  You do not take out permanent coverage and cancel it ten years later.  Bad move.  You are paying to ensure the protection is there when it is needed.

People who cancel their permanent life insurance policies have lost out on the guaranteed death benefits the policy will be paying the beneficiary.  Never take out a policy you cannot afford to keep for the coverage period, either term or permanent.  It does not do any good if you cancel it and then pass away.  If a considerably cheaper policy is available to you can afford, this is the better situation to be in.

Having the right coverage for your situation comes down to finding a seasoned, independent insurance agent/broker that makes recommendations based on your specific needs, not someone pushing their own agenda.  Financial entertainers may not share your ideology, values or risk tolerances.   Remember that.

It takes a good needs analysis and a your input on what you are trying to achieve before application time.  Maybe you’re better off with a simple 20 year term policy, or maybe a term policy combined with a small whole life policy etc.  No Lapse, Guaranteed Universal Life Policies are becoming more popular and may provide an excellent permanent alternative to the more traditional whole life insurance.  They do not have any cash value, but have much lower rates.

Don’t get sucked into the one size fits all, term life mentality where you can invest your ways into guarantees.  While it has some common sense behind it, the assumptions that everyone has the same financial discipline and risk tolerance is missing.

Like anyone else, Dave Ramsey is trying to earn a living.  He does this by trying to amass people who think like he does.  His “tribe” so to speak.  He is compensated for referring “term life insurance” out to a large insurance, big box agency, Zander Insurance.  Why doesn’t he recommend anyone else?  Are they really offering the best term life insurance companies or meeting production requirements of the insurers?  Nobody really knows do they…including Dave.

Dave Ramsey and Suze Orman are financial entertainers.  They thrive on drama to drive their opinions and goals home.  The don’t have a degree or licensure in life insurance, just opinions.  Being a popular financial entertainer does not make you an authority on life insurance either.

Term Life Insurance vs Whole Life Insurance

Term life insurance versus whole life insurance coverage, well that is apples versus oranges, period.  There is a reason life insurance companies and reputable independent agents market all these types of coverage.  People need and want professionals to deliver personal, financial peace of mind specific to them.  You do not need to have approval of those who do not know your personal situation and values.  Incorporating smart money and having the right life insurance plan is the goal.

The whole life insurance”ripoff” is just drama to get more people to buy what he is selling.  Folks, he is in business and being compensated very well.  He has helped plenty of people with their financial problems, but life insurance is not his specialty.  He just has an opinion just like the rest of the world.  Enough said there.

Realistically, they do not have a crystal ball and cannot guarantee any returns to you.  While I have respect for their thoughts and values, as it makes sense, they do not seem to understand that consumers situations are not black and white.  Furthermore, many people don’t subscribe to investing… beyond a bank CD.

Remember, these gurus don’t know you either and there is more than one way to skin a cat, right?

The Take Home on Whole Life and Term Life Insurance

The best way to qualify Term life insurance is to remember that it expires so it is used for a defined period of time only.  Most policies expire at age 80 while some other newer policies will reach 90 or 95.

With Whole Life Insurance, it is really about wealth transfer and absolute guarantees.  It isn’t really for investing or building up savings.  I’m not suggesting that a good par policy can’t build some solid cash over time, but it is not the key point of the coverage, just a benefit.  It does not expire and will pay out when absolute guarantees for wealth transfer are required.  That is a power of permanent life insurance that term life insurance cannot offer.  That is the life insurance consumer who buys a whole life policy vs a term life insurance policy.

Dave Ramsey and Suze Orman with their term life insurance arguments, do have sound thoughts, but they are operating from an assumption that people are buying life insurance for all for the same reasons. They assume that years of investing can’t crash down and take years to recover.  Also assumed is that everyone has the comfort level with investing and/or the resources to even do so.  That is a major flaw.

Only life insurance can guarantee wealth transfer when it is needed and is done typically, tax free.  That is why many wealthy people use permanent life insurance to see that their estate values are preserved.  It is also why many seniors protect there loved ones from even the expense of a burial costs.

Conclusion

All 50 states have a department of insurance that approves and regulates life insurance.  It is illegal for any insurance company to market products not approved by the state.  If whole life insurance was “terrible” the state insurance commissioners would not allow the sale of it.  It is pricey for a large policy.  Those large whole life policies are for people and businesses with deep pockets, not the average middle class individual.

If you are dealing with an representative pushing a type of life insurance coverage you are not interested in, you better move to another independent agent/broker.

There are all kinds of proponents that just sell term life and say invest the rest.  It can be good for some people depending upon age and goals.  On the other hand, there are representatives that just push whole life insurance.  It is often presented as an investment.  Remember, these are salespeople who are pushing their ideology onto you.

Give them your ear, but what do you think and want?

Don’t use term life insurance to pay estate taxes or set up a pension maximization plan, though.  That is not in your best interest.  Whole Life insurance isn’t required but it seems that many peopel don’t know about guaranteed universal life insurance…fixed premiums, guaranteed level death benefit to even age 121!!  How’s going to outlive that?

In my business, we have to help people assess what is best for them.  From that point, we locate the best life insurance company and product for their needs.  The object is to direct people into something that they will be completely comfortable and confident in.  A plan that is affordable, first and foremost.  Clients will not keep it or stick to a financial protection strategy otherwise.

Life insurance requires out of the box thinking and an open mind.  Yes, there are some weak products.

I’m not a fan of traditional universal life insurance.  Whole life insurance still has its place, but it is overused in cases where GUL is a much better fit.

In our office, life insurance is never an investment.  Whole life insurance offers lifetime guarantees that cost a great deal more than other types of insurance.  While it is expensive in your younger years, the level lifetime premium is actually lower in you later years because of averaging.

If you are estate planning or preparing for end of life expenses, you must have a better plan then just “term life insurance.”  Outliving the coverage is quite common these days.  When people are up in their years, remembering to exercise a conversion option doesn’t happen either.

What happens?  The policy expires or goes gang busters in cost to keep.  Now, there is a big problem!!

That’s right.  Dropped right when the coverage is needed the most.

People’s needs change do to unexpected things in life.  Sometimes the best laid plans fall apart even when well executed.

A proper life insurance plan can help protect the financial impact on you, your family or your business when death occurs.

If you would like to discuss your situation with us, I will be here to help you sort it out.  Many people just do not need permanent coverage, just depends on where you are financially in life and what your personal goals are. With us, honest answers are what you get, not just canned ideology.  Give us a call for the fastest service, 800-598-6445.  An email is always welcome if you are more comfortable along that route.

Oh, and always feel free to leave comments below.

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