Term Life vs. Whole Life
I say all the time that "Certified" does not always mean "Qualified." I am a certified financial coach, but I can admit that I don't feel qualified to coach most individuals in this area because it is really not my expertise. My primary reason for getting the certification was to assist married couples in getting out of financial stress and debt. That being said, I know my limitations, and when someone calls me for financial help, I refer them to another coach or resource. I have a few books on finance, and from time to time, I will share excerpts from what I have read. Today's tip is directly from Dave Ramsey's Total Money Makeover.
MYTH: Cash Value life insurance, like Whole Life, will help me retire wealthy.
TRUTH: Cash Value life insurance is one of the worst financial products available.
Sadly, more than two-thirds of the life insurance policies sold today are Cash Value policies. A Cash Value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are horrible. Your insurance person will show you wonderful projections, but none of these policies perform as projected. Let’s look at an example. If a thirty-year-old man has $100 per month to spend on life insurance and shops the top five Cash Value companies, he will find he can purchase an average of $125,000 in insurance for his family.
The pitch is to get a policy that will build up savings for retirement, which is what a Cash Value policy does. However, if this same guy purchases twenty-year level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100. Wow. If he goes with the Cash Value option, the other $93 per month should be in savings, right? Well, not really; you see, there are expenses. Expenses? How much? All of the $93 per month disappears in commissions and expenses for the first three years; after that, the return will average 2.6 percent per year for Whole Life, 4.2 percent for Universal Life, and 7.4 percent for the new-and-improved Variable Life policy that includes mutual funds.
These statistics are from Consumer Reports, Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazine, so these are the real numbers. Additionally, a recent article in National Underwriter, The Industry Mouthpiece, showed charts of returns from fourteen national companies. The returns they show average only 6.29 percent over twenty years. Either way, this product is a really bad idea! Worse yet, with Whole Life and Universal Life, the savings you finally build up after being ripped off for years don’t go to your family upon your death; the only benefit paid to your family is the face value of the policy, $125,000 in our example.
The truth is that you would be better off getting a $7 term policy and putting the extra $93 in a cookie jar! At least after three years, you would have $3,000, and when you died, your family would get your savings. As you continue in this book and learn how to have a Total Money Makeover, you will begin investing well. Then, when you are fifty-seven, and the kids are grown and gone, the house is paid for, and you have $700,000 in mutual funds, you’ll become self-insured.
That means when your twenty-year term is up, you shouldn’t need life insurance at all—because with no kids to feed, no house payment, and $700,000, your spouse will just have to suffer through if you die without insurance.
Ramsey, Dave. The Total Money Makeover: Classic Edition (p. 55). Thomas Nelson. Kindle Edition.
