In Dave Ramsey’s most recent article, he makes the case that life insurance is a lousy way for a mother to leave money to her children. The case in point is a debt-free 71 year old mother who is paying $600 per month into a life insurance policy for the purpose of creating an estate to leave to her heirs. Dave Ramsey makes the case that she is much better off investing that money in the stock market with the hopes that it will grow more productively over time. Furthermore, the only people that think that the life insurance approach is a good one are the life insurance agents selling you the policy. As I’ve pointed out in another article about Dave Ramsey, this isn’t the first time he’s been wrong about life insurance.
As many of you know, I’m real big on the math and science of life insurance, so I decided to put his assertion to the test. Is this woman actually better off saving and investing the money?
I ran an illustration from a leading guaranteed U.L. company for a female, standard rate at $600 a month. What I found is that this woman could purchase $218,838 of death benefit guaranteed to age 120. From a longevity standpoint, I think most underwriters would probably agree that a 71 year old standard rated female will probably live to about 85. When I looked at the Internal Rate of Return on the death benefit at age 85, it showed a tax-free rate of return of 10.4%.
Were she to take Dave Ramsey’s advice and invest that $600 per month into the stock market, she’d likely have to grow it in a taxable account, given that she lacks the earned income to contribute to a Roth IRA. So, the question becomes, what rate of return would she have to earn in that taxable account to be able to net 10.4% after tax? At a 15% federal tax rate, and 6% state, she would have to earn an astounding 13.1% just to equal the Internal Rate of Return on the life insurance!
Financial gurus like Dave Ramsey are in the business of dispensing general financial planning for the masses and in doing so, paint everything, including life insurance with a very broad brush. When we put his claims under the microscope of math and science, however, we see that they are unreliable at best, and at worst financially damaging to our clients!
When your clients bring Dave Ramsey up as a reason for not using life insurance in their financial plan, do what I do and put his claims to the test. When you do, you will find that when it comes to the math and science of life insurance, Dave Ramsey is wrong again!