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Is Whole and Universal Life Insurance a Rip-Off?

The following is a response to an article on DavidRamsey.com titled “The Truth About Life Insurance”. The original article can be found here.
For those who are not familiar with David Ramsey, he is a very financially savvy figure who gives some fantastic advice on common financial sense, and has helped thousands of people get out of debt. This provides them a solid basis to start down the path toward financial stability and peace. However, there is one particular area where we must disagree with Dave, and that is on the subject of life insurance. Dave teaches to “Buy Term and Invest the Difference” citing rates of return and badly built permanent life insurance policies to assert that people who buy these policies get, “…ripped off for years…”.

Dave advises to invest in mutual funds, as they get a higher rate of return. Let me explain how they calculate “average rate of return” in a mutual fund. Dave’s example of a 12% average rate of return is more reasonable, but let’s assume there’s a mutual find out there that averages 25%! Wouldn’t that be great! Here’s how a stock brokerage arrives at that number.

Let’s say we start with $100,000 in our mutual fund and the market has a GREAT year and our fund rises 100%.

Now we have $200,000 but the market has a bad year and falls 50% – we are back at 100,000.

Another great year, and our $100,000 goes up 100% again.

We are back to $200,000 but then another bad year hits and our mutual fund goes down 50% leaving us with $100,000 again.

(100 – 50) + (100 – 50) = 100 divided by 4 (years) = 25% average rate of return.

You have gotten a 25% average rate of return on your $100,000 and still have not earned a dime. It is truthful but misleading, and this is how a mutual fund calculates an “average rate of return”. This DOES NOT take into account taxes in any form, adding further exposure. Does that sound fair?


In a whole life insurance policy that pays 6% yearly compounding on $100,000 in cash value over 4 years will leave you with $136,048.89…and this is not taking into account any policy dividends that would add to the policy’s cash value, any paid-up additions, or any contributions. Granted, dividends are not guaranteed in any given year, but there are life insurance companies who currently have 80+ years of continuous dividend payments, so there is a safe assumption that dividends will continue to be paid in many cases. The reason it works this way is that compounding interest cannot fall to a negative, and the value of each unit of that policy can never decrease like a stock share. A mutual fund can fall at the drop of a hat.

We are not advocating against term life insurance! In fact, term life is a great low-cost product and serves many different uses! However, the advice to “buy term and invest the difference 100% of the time” is logically and mathematically flawed. I hope I’ve made that very clear. If you’d like a free term life insurance quote or whole life insurance quote, contact us and we will educate you on the REAL “Truth About Life Insurance”.

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