Dave Ramsey Criticizes Whole Life Insurance as a Poor Investment Choice
Financial personality Dave Ramsey has recently expressed his strong disapproval of whole life insurance, referring to it as “one of the worst financial products alive today.” Ramsey, who is known for his stern but thoughtful financial advice, blasted the investing approach during a podcast episode when an Arizona dad called in to seek guidance.
Whole life insurance policies, which offer permanent coverage at a locked-in rate, allow policyholders to borrow against the policy’s cash value in the future. However, Ramsey argues that these policies are akin to the payday lenders of the middle class. He believes that investing in such policies is a signal that individuals intend to remain in the middle class for the rest of their lives.
Ramsey points out that the average return on a whole life policy is a meager 1.2%. Additionally, if policyholders want to use the money they have built up in the policy, they have to pay interest to the insurance company. This results in a loss of money rather than a gain.
Furthermore, whole life insurance premiums are significantly higher than term life insurance premiums. Ramsey claims that whole life policies can cost, on average, 20 times more than term policies. For instance, while a $100,000 term life policy may cost $5 per month, an equivalent whole life policy could set you back $100 per month.
In the first three years of payments, the insurance company keeps every dollar invested as a commission. This means that policyholders do not see any growth during this time. The returns on whole life insurance policies, even after investing for several decades, average around 2% or less. In comparison, investments in stocks, mutual funds, real estate, or even conservative options like CDs or high-yield savings accounts, can offer higher returns.
Ramsey also highlights that a significant portion of the money invested in whole life insurance policies goes towards sales commissions. With whole life policies, it can take ten years or more for the cash value to equal the amount paid in premiums and fees.
In conclusion, Ramsey strongly advises against investing in whole life insurance policies. He urges individuals to consider alternative investment options that offer higher returns and do not involve exorbitant fees.
