“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.