If you ever want to see the veins in Dave Ramsey’s bulging head, ask him about whole life insurance. Ramsey, like most other financial advisers, hates it; he calls it a scam with a terrible return. The fact that many insurance agents can still convince their clients to buy a whole life makes the situation even worse. By the time many realize that they have been cheated, it is too late. They’ve already invested money in a policy that charges such a high fee that much of any potential return is swallowed up.
What is a whole life policy?
There are many types of life insurance products, but most can be classified as “term” or “permanent”. As the name suggests, term life insurance provides protection upon death for a specific length of time, typically up to 30 years. As long as the premium is paid, the policyholder is covered. Once the term expires, the policy expires and if the policyholder wishes to continue to benefit from the coverage, he must purchase another policy.
Whole life is a type of permanent life insurance. For some, the main selling point is that coverage can last the life of the policy holder as long as premiums are paid. The bounty is locked, which means it cannot change. And here’s where insurance agents âsweetenâ the pot: a whole life policy creates cash value. The more the policyholder pays a premium, the more money he can borrow or leave to his heirs. It is sold as a financial product that offers a death benefit and guarantees a return on investment.
A guaranteed investment looks pretty good for anyone who’s hesitant to invest their money in the stock market, where values ââgo up and down. But a closer look at the entire life reveals many problems – problems that an agent earning a large commission on the sale is unlikely to mention.
Problem # 1: shift the percentages
How much of each premium goes to pay the death benefit and how much goes to the cash value changes over time. In the early years, a larger percentage of each premium goes towards the cash value. As the policyholder ages, more goes into the policy, and less cash value is built.
Problem # 2: Slow growth
The downside to buying a guaranteed growth product is that the growth is slow and the interest rate paid to the insured tends to be pathetic, especially compared to the overall stock market. If a person buys their whole life thinking it will fund their retirement, they are likely to be disappointed with their income.
Problem # 3: cash value may disappear
For years a person contributes to a whole life insurance policy, waiting for the day they can receive a check for the full cash value the policy has built up. When they purchased the policy, the policyholder was informed that they would receive the funds once they reached maturity age. The problem is, for most insurance companies, the maturity age is between 95 and 121 years old. As long as the policyholder lives to this age, he will receive a check for the cash value. If the policyholder does not touch the cash surrender value and dies before the maturity age, the insurance company retains the entire cash surrender value. The policyholder’s heirs get the death benefit associated with the policy, but all that money accumulated over the years? It belongs to the insurer.
Problem # 4: Borrowing for cash sounds like an unhealthy joke
Suppose the insured realizes that he does not want his cash value to disappear, then he decides to do something with the money accumulated in his account. Maybe they want to go on a trip or make some home improvements. They borrow money and then have to pay it back with interest. That’s right, they pay interest to borrow their own money. And if the policyholder does not reimburse the loan in full, the insurance company deducts the difference from his death benefit.
Problem # 5: getting rid of the police is expensive
Imagine that someone has contributed to a whole life insurance policy for years and finally sees the light, deciding that it was all a waste of money. They choose to buy a much cheaper term life insurance policy and put the savings in a bank account or invest it with a broker. They tell their insurance company that they want to surrender or cancel their policy. According to the policy, the insurance company collects the policyholder by deducting the fees and sending the remainder of the cash value. The amount a policyholder receives is likely to be much less than he expected.
Term life is always the best bet
Ramsey tells his followers that their only job is to replace their income when they die. A term life insurance policy is the best and cheapest way to make sure this happens. Moreover, any insurance agent who tries to convince a client that permanent life insurance is the way to go is not looking for the best interests of the client.
No matter how serious an agent looks, it’s important to remember that they are selling a product for which they will receive a commission. While an agent may be the most ethical person on the planet, it is always up to the customer to investigate a product before making a purchase and seek out an insurance company that respects their decisions.