LI FE I N S U R A N C E
Dispelling the Myths of Life Insurance
Dave Ramsey and the “Buy Term and Invest the Difference” Fallacy
Dave Ramsey is the founder and CEO of the company Ramsey Solutions, where he’s helped people take control of their money and their lives since 1992. He’s also an eight-time national bestselling author, personal finance expert and host of The Ramsey Show.
By David McKnight
34 | CALIFORNIA BROKER
nless you’ve been hiding under a rock, you’re well aware that Dave Ramsey hates permanent life insurance. Here’s what he has to say about it on his website. “There are two main kinds of life insurance (with a few other varieties we’ll deal with later). But the basic types are term life and permanent life insurance. Even though all the different forms of permanent life insurance are way more expensive and confusing than term life, that doesn’t mean they’re not popular. We believe that’s because many people just lack the info about these rip-offs.” In other words, the only reason someone would enter into a permanent life insurance policy is because they haven’t done enough research. They’re gullible, and they simply don’t have enough information. Once a consumer gets fully educated, however, they’ll readily conclude that term life insurance is the only cost-effective way to go. You’re much better off, Ramsey insists, taking the money you were thinking about contributing to your permanent life insurance policy, buying a term life insurance policy and investing the balance into a more traditional tax-free account like a Roth IRA or Roth 401(k). This approach has come to be known as “buy term and invest the difference.” In an effort to buttress the claim that permanent life insurance is a ripoff, Ramsey will show you a comparison that looks something like this. Let’s say that you’re 35 years old and you contribute $26,000 per year for the next 30 years into an Indexed Universal Life insurance policy growing at 6.24% per year. Let’s also say that Indexed Universal Life (IUL) has a $500,000 death benefit. By the time you retire at age 65, your cash value will only be $1,944,145. Now, let’s instead take that $26,000 per year and fully fund your Roth 401(k) at $20,500 and put the remaining $5,500 into your Roth IRA. For
