When it comes to whole life insurance, “it’s not a mild dislike,” Dave Ramsey said on a recent episode of “The Ramsey Show,” where he’s been providing financial advice since 1992. “I hate it.”
Why the disdain for all of life when so many Americans invest in it? Half have some form of life insurance, according to Annuity.org.
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The idea is twofold: First, having life insurance allows people to live with a sense of financial security. And second, when a policyholder dies, the beneficiary (or beneficiaries) receive the funds from the permanent life insurance investments.
However, when counting the reasons for his hatred, Ramsey has three. And just like an overzealous insurance salesman, they’re pretty hard to ignore.
1. Fees, fees, fees
For every $100 you invest in whole life insurance, the first $5 goes toward purchasing the insurance itself; the other $95 goes toward building the cash value of your investment. Yes, but…for the first three years, your money goes solely toward fees.
Someone is kissing, and it’s not your beneficiary.
“It’s an early investment,” Ramsey said. “That’s not necessarily a bad thing in and of itself, but it’s frowned upon in the world of financial investing in general.”
2. Bad returns
Okay, but you have it all your life, right? Well, it doesn’t get much better after the first three years. The average rate of return after those “three years of zeros” will be around 1.2% on that $95.
“Let’s be generous and say it’s double,” Ramsey said. “It is still not a good long-term investment. If I could get 2.4% in my money market, I would be dancing a gig, but not in my long-term investments.” Those, he noted, must be above 10% to beat inflation and taxes.
“That makes it absolutely horrendous,” Ramsey said. “Decades ago, the financial community moved generally toward investing in term life insurance for $5 from the $100, and doing just about anything else with the other $95, but in the investment world instead of the insurance world.
In addition, whole life fee structures rob you of the power of money because the sacrificed cash denies you the compound interest you would see through traditional investing. Also, insurance companies may refuse to refund some of your money if you can no longer keep up with the payments.
3. Guess who gets most of the dough when you die?
The stakes in the heart for life is that when you die, the insurer gets to keep your money. That’s right: They absorb the cash value of your policy, while survivors receive any leftovers in what’s called a “death benefit.” The policyholder can only use the cash value while they are alive.
It’s enough to make you want to have insurance on your life insurance. Here are some better ways to put your retirement allowances to work.
Read more: Here’s how much the average 60-year-old American has in retirement savings. How do your savings compare?
Alternative One: Term Life Insurance
As Ramsey mentions, term life insurance is a much better option. Term life insurance refers to a purchase that lasts for a period of time, perhaps 10, 15, or 20 years, and guarantees payment if someone dies within that time frame.
With its restricted time period, the term is much cheaper than the entire one. Please note that it only provides a death benefit and premiums depend on your age and health. Also know that you can’t invest the money elsewhere, and don’t get it back if the term expires and you’re still alive. Consider combining installment payments with investments that will grow with them.
Alternative two: the 401(k)
The 401(k) offers another financial protection in the event of your death. Here’s the rub, though: Many Americans don’t even have a 401(k), including those who are self-employed.
The good news for those with full-time jobs is that your employer can match your 401(k) investment, typically up to 6% of your salary. That’s free money for your retirement. Let’s repeat that: free money.
Financial advisors can help you invest that money for retirement. Plus, you get a tax break for investing in your 401(k), since you won’t be charged for those contributions until you make withdrawals. This could be when you retire or want to give it to a beneficiary.
Alternative Three: The Roth IRA
The beauty of any individual retirement account (IRA) is that you can start one even if you already have a 401(k). With a Roth IRA, you pay taxes upfront. This benefits you when you withdraw cash, since you have already paid the tax: what you take is what you keep (unless, of course, you use it to buy something of a lifetime).
Just like a 401(k), you can invest in any market-linked stock or index fund to grow your funds. You can open one any time you want and keep it for as long as you want. Withdrawals must be made after age 59½ and/or after a five-year holding period.
Bottom line: it’s completely your life
With so many options for saving for the future and for your loved ones, there’s no reason to invest all your savings in permanent life insurance. It’s what the big insurers are betting you’ll do, but as Ramsey would say, you’d better wash a jar of orange marmalade.
“Put the money in a fucking fruit jar,” Ramsey quipped. “At least it’s there when you die!”
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This article is for information only and should not be construed as advice. It is provided without warranty of any kind.