If you are a fan of Dave Ramsey or Suze Orman, you’re in the right place. And if you are a hater of Dave Ramsey or Suze Orman, you are also in the right place. Seriously, everyone needs the information in this post. In fact, I wrote a book about this and launched it on Amazon in 2014. Some of you bought it (THANK YOU!) but most of you didn’t. So, if you want to buy it now, here’s the link. If you don’t want the book, that’s ok too. Just be sure to read this ENTIRE post. I promise. You won’t regret it!
So, what exactly did Dave and Suze get wrong? To be honest, there’s a lot they have gotten wrong but for today’s post, I am focusing on what they got wrong about Life Insurance. There’s so much to unpack but I will devote a separate post to each topic so you can get all the information you need to make the best financial decisions for you and your family.
If you follow Dave and Suzy, you know how they feel about life insurance. They often say, “avoid the high fees of Whole Life”. There’s no argument here. I couldn’t agree more! Whole life is the most expensive life insurance on the planet! In fact, it’s so expensive the companies who sell it will not even produce an expense report. In fact, as someone who is licensed to sell whole life insurance and has spent more than 35 years working in the financial services industry, I have yet to see an expense report for a whole life insurance policy. Do me a favor. If you own whole life insurance, call your life insurance agent and request an expense report. I DOUBLE DARE YOU! Spoiler alert. They don’t exist! And for anyone out there who wants to show me your in-force illustration from your last life insurance review, that’s not an expense report. An expense report shows you where every dime of your money goes and yes, if you want to see an expense report on the life insurance strategies I recommend, just ask. I am happy to show you. But I must warn you. Once you discover what Dave and Suze get wrong or maybe just forget to tell you, you will NEVER take advice from Financial Celebrities like these guys ever again.
Now that we know whole life insurance is the most expensive life insurance on the planet and it should be avoided at all costs, this is where Dave and Suzy offer some of their worst financial advice; Buy Term and Invest the Difference. I often say, old financial advice becomes bad financial advice and leads you to make bad financial decisions, and this is no exception. A.L. Williams coined the phrase “Buy Term and Invest the Difference” in the 1970s. FIFTY YEARS AGO!!! Do you think anything has changed in the last 50 years with life insurance? Anything?!
This is where working with a full-time licensed financial advisor will pay off. We are students of our industry. When things change, we don’t stick our heads in the sand and keep promoting 50-year-old strategies. Can you imagine if T-Mobile came out with an ad today reintroducing the bag phone Motorola produced in 1988? You would immediately think, “what a ridiculous idea”. Why would I give up my smart phone that fits in my pocket for a bag phone? Advising you to buy term life insurance and invest the difference is no different than recommending you buy a bag phone in 2024! I mean c’mon people! It’s a phone! You only need it to make a phone call in an emergency. You don’t need to waste a bunch of money on a product that can do a bunch of other things! This is exactly what Dave and Suze recommend. Buy term life insurance because it’s the cheapest. Who cares if there is a better option – you can’t afford it! Isn’t that what Suze always says?
Ok. Some of you reading this post are too far gone. You’ve drank the proverbial kool-aid and are convinced that Dave and Suze are God and the rest of us are the devil. I can’t help you. BUT for those of you reading who have a brain and aren’t afraid to use it, I’m about to blow your mind.
In the 70’s when A.L. Williams went on his “Buy term and invest the difference” crusade, he was quite successful in getting people to cash-in their whole life insurance policies and buy term insurance instead. The insurance industry took notice of his success and quickly went to work. As a quick review, there are only TWO types of life insurance: Term and Permanent. Term is…. Well, for a term of say 10, 20 or 30 years. Permanent is… well, permanent as in for life! Within each of these categories, there are several types of policies designed to provide security and protection for you and your family. In this post, let’s look at how permanent life insurance has changed over the last 50 years.
Since this “Buy term and invest the difference” campaign was getting such a good response, in 1979 the insurance industry introduced Universal Life Insurance. This policy has 2 components: A Death Benefit and Cash Value. What is very, very interesting about the death benefit component of this policy is that is actually priced like a term life insurance policy! WAIT! WHAT?!?!? Remember that expense report I mentioned earlier? If you were to look at an expense report for a universal life insurance policy, you would see that the cost of insurance is priced as an annual renewable TERM insurance policy. You’re probably asking yourself, “what is annual renewable term?” Stay with me guys. This is not where you click off. Grab a caffeinated drink if you need to but whatever you do, KEEP READING.
Ok. Let’s break this down. What do we know about term life insurance? It’s the cheapest and it’s usually purchased for a 10, 20 or 30 year term. BUT there’s another option you don’t know about. It’s called Annual Renewable Term. It is the ABSOLUTE CHEAPEST cost of insurance on the planet. It’s the cost to insure you at your current age and health for only one year. In contrast, a 10-year term policy takes the cost of each year – which increases every year as we get older – adds them together and then divides by 10 to give you a fixed annual premium for 10 years. So, even though term is the cheapest coverage you are still over-paying for your coverage UNLESS you are using a product with annual renewable term pricing. Where are Dave and Suze on this one? Listen! We are on to something guys but we can’t stop here!
Let’s take a deep dive into Universal Life Insurance. What we know is that it has 2 components: a death benefit and cash value. The death benefit is priced as annual renewable term and the cash value receives a fixed rate of interest. Remember, this type of policy came out in 1979. Where were interest rates in 1979? In December 1979, the fed raised interest rates to 13.78%. WOW! We have the absolute cheapest life insurance on the planet PLUS nearly 14% interest on any extra money you wanted to invest into the cash value side of your policy!! That’s one heck of an opportunity! Interesting fact. 1979 was well BEFORE 1987 when Suze Orman formed the Suze Orman Financial Group and 1992 when Dave Ramsey formed Ramsey Solutions. How did they miss this? Or did they? Money market rates would climb to an astonishing 19% by 1981 and by 1984, rates would have dropped by nearly half. At the same time, the stock market was in the middle of a 5-year bull market (1982 – 1987) when some markets around the world saw a 296% increase. Houston, we have a problem. Who is going to invest money into a Universal Life Insurance policy when interest rates are plummeting and the stock market is soaring? The insurance industry was keeping very close tabs on interest rates as well as the stock market and wasted no time releasing a new and improved permanent life insurance product.
In 1986, VARIABLE Universal Life Insurance was released. The insurance industry made one small adjustment to the cash value side of the policy. Instead of paying a fixed rate of interest on the extra money you invested into your policy, now you could invest into the equivalent of no-load mutual funds. Now, I hear some of you screaming at your phone or computer screen “why in the world would you ever want to invest extra money into your life insurance policy?” There is a VERY good reason why you would want to do that but that’s not what this post is about so be sure to go to JondaKnows.com/resources to learn more.
Ok so now we have a Permanent Life Insurance Policy that’s priced like a term insurance policy that will allow you to invest your premium into the equivalent of no-load mutual funds during what would turn out to be the best bull market in history at that time. From December 1987 – March 2000 the S&P500 returned 582%! Guys, I HAVE to point out the obvious here. If you know anything about Dave Ramsey and Suze Orman at all, you know their two favorite things when it comes to personal finance are: Term life insurance and no-load mutual funds. Ooooooooh Myyyyyyyyy Woooooorrrrrdddd!!! Variable Universal Life Insurance should’ve been the perfect storm for these two financial celebrities. Again, how did they miss this?
They say all good things must come to an end and in March 2000 the dot-com bubble burst. The S&P500 would see three years back-to-back of losses – something investors and advisors alike had never experienced. Not to worry! The insurance industry was way ahead of this trend and in 1997 introduced a life insurance concept that would radically change how we now create financial security. No more trying to figure out whether to save for a rainy-day, pay off debt, save for college, plan for retirement, or buy life insurance. Much like choosing your smart phone over a bag phone… it’s a no-brainer!
This new permanent life insurance product is called Indexed Universal Life. Much like Universal and Variable Universal Life Insurance, it is comprised of a death benefit and cash value. But this product has what you might call a secret sauce. The cash value component can receive market-like returns while never losing a dime even when the index strategy goes down. That’s right! Your cash value can go up but never go down due to index losses. What?! How is that even possible you ask? It’s really quite simple. Your cash value is never directly invested in the stock market. Rather, it receives an interest credit based upon the performance of the index strategy never to be less than zero. There’s actually an insurance company with a marketing campaign “Zero is your Hero”. It may sound funny but it’s true! Why would anyone want to lose money if they didn’t have to? Let’s think about this for a minute. Since 1997, you have had a permanent life insurance product available to you that is priced like an annual renewable term policy, allows you to invest extra money into the cash value component that will grow when the index strategy goes up and is protected from losses when the index strategy goes down. Talk about having your cake and eating it too! Why is everyone not doing this? The answer to that question will require its own post.