- If you’re looking for life insurance, you can choose between whole life and a term life policy.
- Financial expert Dave Ramsey advises against whole life for one big reason.
Check out The Ascent’s best life insurances for 2021
Buying life insurance is an important way to protect the people you care about who depend on you financially. But life insurance comes in different forms.
With a term life insurance policy, you buy coverage that runs out after a specific term or period. That term might be 10 years, 20 years, 30 years, or a different number of years.
With a whole life insurance policy, you buy coverage that never runs out in your lifetime. This should, at least in theory, give your loved ones more protection than a term life policy.
But that’s not the only benefit of whole life insurance. In addition to permanent coverage, whole life insurance policies accumulate a cash value over time. That cash value is something you can borrow against or even cash out should you choose to go that route.
For these reasons, you may be tempted to purchase whole life insurance rather than a term life policy. But is that a good idea? One financial expert is adamant that it isn’t.
Dave Ramsey is not a fan of whole life insurance
Many financial experts advise against buying whole life insurance. And Dave Ramsey is one of them.
Ramsey point blank says whole life insurance is a rip-off. The reason? It costs a lot more than term life insurance, so much so that its price tag can be prohibitive.
But won’t you get your money back with a whole life insurance policy? Not necessarily.
See, the problem with whole life insurance is that due to its cost, many people who buy it inevitably end up letting their coverage lapse because they stop being able to afford their premiums. In doing so, they not only lose their coverage but also, incur surrender fees that can eat away at or even eliminate the cash value they’ve accumulated.
That’s why Ramsey insists term life insurance is a better bet. Since it’s so much more affordable, if you buy a term life policy, you’ll be more likely to retain your coverage. While you won’t get to accumulate that cash value, you also won’t be spending as much. You’ll have the option to save and invest the money you aren’t putting into a life insurance policy.
Let’s imagine a term life policy costs you $100 a month, and a whole life policy with the same death benefit costs you $350 a month. If you stick with the term life policy, you can save yourself $250 a month, or $3,000 a year.
If you invest that money in the stock market over 30 years, you might manage to snag an average annual 8% return in your portfolio, which is a few percentage points below the market’s average. The result? A portfolio worth around $340,000.
Now, you can argue that you might accumulate a similar balance with a whole life insurance policy. Or, you might not. The reason? Whole life insurance doesn’t tend to deliver such strong returns. Consumer Reports says the average annual rate of return on a whole life policy is 1.5%. That pales in comparison to the stock market’s average, or even half the stock market’s average.
Make the right call
Buying life insurance is an important thing to do. But you may want to take Dave Ramsey’s advice and stick to a term life policy. While your coverage under that policy will eventually run out, and it won’t accumulate a cash value, its affordable price point will make it so you’re less likely to drop your coverage — and leave your loved ones with no protection whatsoever.
Life Insurance Protection for You and Your Family
While many varieties of insurance coverage are designed to help protect a person’s family and assets, life insurance is a vital type of protection. The right life insurance can help protect the people that depend on you the most if you should pass away. Choosing the right life insurance policy is critical to ensure your loved ones are protected properly. We have sorted through the various options to provide you with our choices for the best life insurance policies available today.