“A long habit of not thinking a thing wrong, gives it a superficial appearance of being right, and raises at first a formidable outcry in defense of custom. But the tumult soon subsides. Time makes more converts than reason.” — Thomas Paine
Over 200 years ago, in his pamphlet “Common Sense,” the political philosopher Thomas Paine urged his fellow brethren to challenge fallacies that had been blindly accepted as fact.
Similarly, in this column, I’ve often used math to debunk the popular personal finance entertainer, Dave Ramsey. I’ve also used logic.
Here, I’ll use Paine’s words to illuminate Ramsey’s inept and inaccurate beliefs regarding Cash Value Life Insurance (CVLI). Ramsey regularly rails against such products during “The Dave Ramsey Show,” despite the fact that his claims are never validated with math or logic.
That, in turn, leads to his myths be mistaken for truth.
Consider this: On Mon., Aug. 1, at the very end of “The Dave Ramsey Show,” I heard Ramsey rail against permanent cash value life insurance. But this wasn’t just any rant. It was an attack!
Ramsey used his platform to assail the insurance industry, those within it and those who support it. To my ear, this tirade illustrated one reason why people like Dave Ramsey so much, and also why he must be regulated, so that he and other entertainers who provide educational financial basics can stop hiding behind the same seemingly altruistically cloak.
I won’t bore you with the usual pedantic Ramsey soundbites that assume his listeners can’t put two and two together. But I will share these highlights from that rant against CVLI:
“…If you are paying $10.00/month for your term life insurance and you bought the exact same amount of whole life insurance, you would pay $200.00/ month…”
Insurance does not have the possibility of building equity, like a house does. It does not have that possibility because you can’t collect on it without dying…”
“It’s really the pay day lender of the middle class…”
The first flaw with Dave’s all CVLI is bad and all Term is good myth, is the notion that CVLI premiums are 20 times greater than term insurance premiums.
Since I’m a math guy, let’s use some math…
Also by this writer:
I ran several different term and guaranteed universal life (GUL) quotes. (I used GUL rather than Whole Life since Dave Ramsey has continually lumped all CVLI together.) I have provided three different scenarios in an effort to eliminate the appearance of bias and/or the idea that I cherry-picked ideal scenarios that favor CVLI.
Here are the scenarios I used, which were run for both smokers and non-smokers:
- $250,000 preferred best 30 year term policy on a twenty year old male
- $500,000 preferred best 20 year term policy on a forty year old female
- $150,000 standard health 20 year term policy on a sixty year old male
Using Ramsey math, the average premium for the GULs should have been $44,229 per year per policy. But in actuality, the average annual premium was only $3,637.
The closest Dave’s statements came to being accurate was with scenario one, where he overestimated the GUL premiums by $7,265. The furthest from being accurate came from scenario three, where he overestimated the GUL premiums by $124,065.
Of course, when we use overly inflated assumptions against permanent insurance, it’s easy to conclude term is always better. But this couldn’t be further from the truth, because all insurance products should be considered tools for express purposes.
What’s more, each state plus the District of Columbia, Puerto Rico, U.S. Virgin Islands and the Northern Mariana Islands has an insurance commissioner. These regulators approve the products that can be sold in their state or territory. They revise and/or alter products to suit the public’s interest. In some cases, they eliminate products that cannot be justified.
Given that cash value life insurance (CVLI) has been around for more than a century, Dave Ramsey must want his audience to believe that every insurance commissioner for the last hundred years — both appointed and elected — has been persuaded by greed or bamboozled by fallacies disguised as fact, to allow the sale of CVLI at the expense of the middle class.
Frankly, it’s juvenile for a financial professional to say a particular type of product is always bad. Many experienced, educated, authentic and genuinely sincere insurance regulators have approved of CVLI over the decades.
Ramsey also says that cash value life insurance is ‘the payday lender of the middle class.’
Payday lenders are predatory, and their features/benefits/costs are rarely understood. Permanent life insurance is easy to understand. I pay “X” amount per month for “Y” amount of insurance. In 10 years, I will still pay “X” amount per month for “Y” amount of insurance. And the same will be true in 30 years.
How much the cash value will grow based on dividends or credited interest, is more challenging to comprehend.
The reality is, life insurance, for many, is a permanent need and thus the increase to cash value is nice but unimportant. Most won’t save enough. Most won’t invest enough. And most will spend too much.
It’s a permanent need, since many will need to cover burial expenses, many will die with debts, and many will not have the financial capacity to replace income lost upon the death of a spouse.
Finally, Dave Ramsey has preached that there are no living benefits associated with CVLI. In fact, many policies today allow the policy holder to withdraw income if incurring long term care costs. This is an important living benefit, one which I’m sure Dave would agree with since he tells everyone over the age of 60 to buy long term care insurance. It’s blatantly obvious Dave Ramsey’s unfounded bias towards CVLI has blinded him to this benefit.
Let’s get back to Thomas Paine, who said: “Common sense will tell us, that the power which hath endeavored to subdue us, is of all others, the most improper to defend us.”
I’d also argue that the power which endeavors to profit from you, is of all others, the most improper to defend you.
Dave Ramsey certainly profits from those he says he’s defending. I wish I could say the same.
I haven’t seen profits. But I have been emailed by many prophets who forecast my demise thanks to my math-spewing, fact-revealing columns.
Let’s continue the conversation on Facebook!