Asian-Americans: an essential life insurance marketing demographic
As this population grows, so does its buying power.
By Warren S. Hersch.
If you’re aiming to expand your presence in certain markets, you could do worse than to direct the lion’s share of your attention to an often overlooked group: Asian-Americans.
Estimated at nearly 20 million, this broad and culturally diverse community — one embracing populations from more than 40 countries and who speak dozens of languages — is impressive by almost any measure.
Just name one benchmark: Household income? Financial assets? Home ownership? Children sent off to college? Asian-Americans surpass (sometimes by a wide margin) statistics for the general U.S. population.
To boot, their numbers and financial clout are growing. That translates into more dollars available to spend on protection products, solutions that Asian-Americans have not, despite a mounting need, adopted as widely as their U.S. peers.
These are among the findings of a 2016 survey by Prudential Financial, “Asian-American Financial Experience.” The focus of an August 25 media briefing hosted by Prudential at the Asia Society in New York City, the study delves into financial challenges the community shares with the larger U.S. population, from funding a secure retirement to managing expenses. Conducted by Harris poll in June, the survey authors polled 2,597 Americans (ages 25-70), about 2,100 of whom self-identify as Asian-Americans.
Agents and advisors looking to serve this community, the survey’s authors stress, would do well to take a tailored, culturally attuned approach to prospecting, planning engagements and client servicing.
“Our survey results show that the need to for a nuanced, culturally acute roadmap to helping Asian-Americans realize their financial goals has never been greater,” the report states. “Companies that take the time to understand and connect with them will be among those best positioned to serve them.”
Best positioned, to be sure, if the connecting happens at the appropriate level, for the Asian-American community is hardly monolithic. The major subgroups — Chinese-, Japanese-, Philipino-, Indian-, Vietnamese- and Korean-Americans have “unique cultural experiences, traditions and histories” the report notes, that influence their financial preparedness, needs and outlook.
Chinese-Americans, for example, tend to have “higher-than-average” education and asset levels, occupy more professional positions, are “self-described savers,” possess greater knowledge of “debt management and investing” and “own a greater diversity of financial products,” than their survey peers. Pilipino-Americans, in contrast, are more likely than their counterparts to carry higher credit card debt, be employed in “a mix of manual and professional careers,” and plan to work in retirement to supplement income.
The differences extend to financial savviness and access to information. Despite their comparative affluence, Chinese-Americans tend to not leverage the services of insurance and financial service professionals as much as other Asian-Americans.
“Chinese-Americans don’t get a lot of exposure to the information and solutions we offer,” says Hurong Lou, a Prudential advisor and panelist. “In contrast, Korean- and Indian-Americans get a lot more education about investments, insurance and managing risk. For different subgroups, the levels of financial information and education vary.”
More striking than the differences are the commonalities among the groups polled. These shared characteristics — a greater propensity to save for one’s golden years, invest in children’s college education and prepare for financial emergencies — sets Asian-Americans apart from the general population. Consider these survey findings:
Twenty-two percent of Asian-American parents surveyed say providing college tuition for their children is “highly important” to them, versus 14 percent of parents in the general population.
Twenty-five percent say taking care of family members is a priority, versus 15 percent of the general population.
Buying a home also is a top goal for 24 percent of Asian-Americans, versus 17 percent of the general population.
Asian-Americans surveyed have a median personal income of $62,000 and median household income of $87,000, versus $42,000 and $62,000, respectively, for the general population.
Asian-Americans estimate the value of their household financial assets, excluding their primary residence or a business, at $445,600, on average, compared with $385,500 for the general population. Seventeen percent of Asian-Americans — about one in every six — have at least $500,000 of equity in their homes, compared with 8 percent of the general population.
Differences relative to the general population extend also to financial support and caring for family members. As the report notes:
Fully a third of Asian-Americans identify themselves as caregivers for another person — typically a spouse, parent, other relative or special-needs child — compared with 21 percent of the general population surveyed.
Seventy percent of Asian-American caregivers say they pay some of the living expenses of the person they’re helping, including 31 percent who pay all those costs. By contrast, 57 percent of caregivers in the general population shoulder some of the living expenses of the person they’re helping, including 28 percent who pay all the costs.
Thirteen percent of Asian-Americans have parents or grandparents living with them, compared with 8 percent of the general population. And 20 percent of Asian-Americans provide financial assistance to relatives, versus only 6 percent of the general population.
“What is most striking to me is that Asian-Americans, as a group, provide more financial support to relatives by almost a three-fold multiple of the general population — that’s staggering,” said Srinivas Reddy, a panelist and senior vice president and head of full service investments, Prudential Retirement, at the media briefing. “That says a lot about this demographic segment and their financial priorities.”
(Srinivas is pictured here, to the right of Prudential’s Smriti Sinha. Photo credit: Vladimir Gitt, Prudential Financial. Click on image to enlarge.)
Added Smriti Sinha, vice president of strategy initiation and development for Prudential individual life insurance: “My personal family experience dovetails with that of the larger [Asian-American] population. Actions do reflect our priorities. The community is doing its best to make sure that the extended family is supported and cared for.”
Doing without financial assistance
Asian-Americans often are not cognizant of solutions and advice that might put their own finances on better footing. The report observes that fewer than 1 in 5 Asian-Americans (18 percent) work with a financial professional, compared with 26 percent of the general population.
Why the lower rate? Survey participants cite high fees, insufficient assets and a preference to “do it on my own” as reasons for sidestepping advisors. More so than the general population, Asian-Americans also responded that they “have never found someone I can trust.”
The Prudential panelists differed as to the factors underpinning this lack of trust. Moderator Betty Liu, an anchor at Bloomberg Television, cited age as a factor: Older Asian-Americans, she suggested, may be less inclined than digitally-savvy and more culturally assimilated millennials to engaging the services of a financial professional. (Liu is pictured below, first from right. Photo credit: Vladimir Gitt, Prudential Financial. Click on image to enlarge.)
Prudential’s Hurong Lou disagreed, arguing that cultural differences — more pronounced among first-generation immigrants than second- or third-generation Asian-Americans —account for the trust gap. As they become more Americanized, he said, they “let their guard down” making them more approachable.
The personal experiences of Lou (pictured here, first from left) align with the survey findings. Those who work with a financial professional are more likely to have been born in the U.S. (23 percent vs. 16 percent who were not) and to speak English (20 percent, versus 7 percent who do not).
Sinha cited still other factors, including Asian-Americans’ “risk appetite,” “access to financial information” and insurers’ varying levels of success in solving for the community’s financial needs through their “channel of choice.” For the millennial set, that means making online interactions more engaging and streamlined. Older Asian-Americans may, in contrast, prefer the personal touch, engaging with advisors through friends, family members or community organizations.
Prudential’s Lou did the last for one Filipino couple — and the effort paid off handsomely. Affluent doctors, the husband and wife were hesitant at first to work with Lou and his team, believing they could manage assets on their own.
But, said Lou, they “liked us enough” to ask the advisor team to join a Filipino-American association where they were active. Within two months, the couple had fully embraced the Prudential agents — so much so that they organized a party for the team’s benefit and recommended Lou & Co. to friends and family invited to attend.
The fact that Lou, a Chinese-American, was of a different ethnic background proved not to be a deterrent to establishing a trusting professional relationship with the couple. Sinha, responding to a question from Bloomberg’s Liu as to whether advisors need to “look like” the community they serve, echoed the point.
“I think this gets back to authenticity — connecting in a meaningful way with our clients and prospects,” said Sinha. “It can’t just be marketing spiel. True engagement happens over time.”
Lacking financial protection
More quality time with the community needs to happen, particularly when the topics of discussion are insurance and annuities. Though a greater percentage of Asian-Americans own stocks than does the general population (29 percent vs. 23 percent), they lag in ownership of protection products.
Fewer than 3 in 10 (28 percent) of Asian-Americans have purchased life insurance outside of work, as compared to 33 percent of the general population. Their adoption rates are similarly lower for:
Life insurance purchased outside a place of employment (27 percent vs. 30 percent)
Health insurance purchased outside a place of employment (15 percent vs. 19 percent)
Fixed and variable annuity ownership (6 percent vs. 9 percent); and
Disability income insurance purchased outside a place of employment (5 percent vs. 8 percent)
“For a community that cares so much about family members, the Asian-Americans population is, oddly, the least penetrated in terms of life insurance and protection solutions,” said Reddy. “That’s why it’s so essential to educate and build awareness about our products within the community.”
That community is rapidly growing. According to U.S. Census data, the Asian-American population increased to 6.6 percent in 2014 from 4.5 percent in 2000. Much of the rise is being fueled by first-generation immigrants who now account for a large majority (73 percent) of the demographic group’s nearly 20 million citizens, a number that’s expected to double by 2050.
As their ranks have increased, so has their buying power: up a whopping 180 percent between 2010 and 2014. The life insurance and financial services industry is betting that, in the years ahead, more of their disposable dollars will be allocated to protection products.
“The median net worth of Asian-Americans today is about $100,000 more than that of the general population,” said Prudential’s Reddy. “Given their unmet protection needs, they represent a huge market opportunity for our industry.”
See the charts beginning on next page for additional highlights from Prudential Financial’s «Asian-American Financial Experience» survey.
By a substantial margin, Asian American households tend to be concentrated in the East and the West, where wages (along with living expenses) tend to be higher than they are in the Midwest or the South. (Click on chart to enlarge.)
A higher percentage of Asian-Americans than non-Asian-Americans rate several family-related financial goals as very important: having enough life insurance to protect loved ones, helping to take care of parents or other family members, and buying a home and providing college tuition for children. (Click on chart to enlarge.)
Though they’re more likely than the general population to own individual stocks, Asian-Americans lag in ownership of some protection products, including life insurance, disability income insurance, fixed/variable annuities and health insurance. (Click on chart to enlarge.)
Not only do Asian-Americans consult a higher number of resources than the general population (5.8 average resources versus 4.1), they also demonstrate a higher propensity to consume information from fewer traditional sources, such as clubs, social media and faithbased resources. (Click on chart to enlarge.)
As this chart shows, Asian-Americans outstrip the general population in education levels, but mirror the broader U.S. public in terms of household composition and marital status. (Click on chart to enlarge.)
Fed proposes change to capital reserve rules for insurance companies
By Kristen Beckman and Jesse Hamilton.
The Federal Reserve Board of Governors today released details of a proposal that would affect insurance company regulatory capital frameworks. The proposal includes two approaches to regulatory capital requirements for supervised insurance institutions that would fulfill compliance needs under the Dodd-Frank Act.
The advance notice of proposed rulemaking (ANPR) applies to nonbank financial companies significantly engaged in insurance activities that are supervised by the board, or insurance companies such as AIG and Prudential, which are deemed systemically important financial institutions (SIFI), bank holding companies (BHC) and savings and loan holding companies (SLHC) significantly engaged in insurance activities. Companies with 25 percent or more of their total consolidated assets in insurance underwriting subsidiaries other than assets associated with insurance underwriting for credit risk would be included.
The proposed capital standards are less stringent for AIG and Prudential than those imposed on Wall Street banks under a long-awaited Federal Reserve proposal that’s meant to limit the chance a major insurer could threaten the financial system. Metropolitan Life previously was tagged with SIFI status but sucessfully sued the government to avoid the designation.
“This proposal is an important step toward capital standards that are both appropriate for our supervised insurance firms and that enhance the resiliency and stability of our financial system,” Fed Chair Janet Yellen said in remarks prepared for the Friday board meeting.
A building block approach (BBA) proposes to use as a starting point “existing legal-entity capital requirements for insurance companies, including state and foreign insurance risk-based capital requirements, and the BHC or bank risk-based capital standards for banking, non-insurance and unregulated entities. A firm’s aggregate capital requirements generally would be the sum of the capital requirements at each subsidiary, with adjustments to address items such as differences in accounting and to eliminate inter-company transactions, and scalars to reflect cross-jurisdictional differences such as differing supervisory objectives and valuation approaches.”
The board said this approach may be appropriate for the 12 insurance depository institution holding companies currently under board supervision as they are significantly engaged in insurance activities but are not systemically important, engage in less complex and foreign activities, and generally prepare financial reporting only using U.S. statutory accounting principles (SAP) rather than generally accepted accounting principles (GAAP).
A consolidated approach (CA) would “categorize all of a consolidated insurance firm’s assets and insurance liabilities into risk segments tailored to account for the liability structure and other unique features of an insurance firm, apply risk factors to the amounts in each segment, and then set a minimum ratio of consolidated capital resources to consolidated capital requirements.”
This approach may be suitable for institutions that are large, complex, international and systemically important.
“A consolidated form of capital requirements would better ensure that the risks these firms pose to the financial system are taken into account,” said the board in the ANPR.
The objectives behind developing capital standards for supervised insurance instittions were to protect insured depository institutions and to promote financial stability.
A draft Federal Register notice released by the board invites public comment on the ANPR. The agency will accept feedback on the capital plan for 60 days. But with a few steps still to go before the standards become a final rule, the process may be difficult to finish this year.
“The approaches to consolidated capital standards described in the draft ANPR reflect input received and considered through engagement with insurance regulators, industry and accounting experts, and representatives from the insurance industry, among other interested parties,” the ANPR said. “By seeking comment through the draft ANPR, the board would have an opportunity to receive input on general approaches to capital regulation for supervised insurance institutions before issuing a specific regulatory proposal for public comment.”
Also Friday, the agency is set to approve a formal proposal for new regulations on how the FSOC-designated insurers must govern themselves and manage their risks and liquidity, overseen by the Fed. This was another mandate from Dodd-Frank, bringing the insurers under prudential standards similar to those imposed on large banks, but tailored for insurers.
MetLife has been embroiled in a legal battle with the U.S. government. Because a judge reversed MetLife’s designation as systemically important, it may dodge the new rules. However, the Treasury Department is pursuing an appeal of the court’s finding that the process to label the company was flawed.
The Fed also intends to propose a capital plan Friday for the 12 insurers it oversees because they own banks, including State Farm Insurance Co., TIAA-CREF and Nationwide Mutual Insurance Co. The proposal for those companies largely defers to the capital requirements already imposed on insurance firms by existing regulators — often state agencies. The Fed will solicit comments from the public for 60 days.
Amigo latino de terrorista de San Bernardino, ¿también vinculado a Al-Qaeda?
Enrique Márquez Jr. fue identificado como el proveedor de armas de los terroristas de San Bernardino —hoy, mucha más información pesa en su contra.
Cuando el gobierno de Estados Unidos entabló una demanda para evitar que la familia de la pareja terrorista de San Bernardino cobrara hasta $275,000 en seguros de vida, reveló más información sobre los nexos con el mundo extremista del islam —no solo de uno de los atacantes, sino de su proveedor de armas.
La nueva información fue revelada en las más de 13 páginas de la querella que ahora pesa contra Minnesota Life Insurance y Supplemental Life Insurance.
Según la nueva información, en 2011 Márquez estuvo involucrado con el grupo “California jihadists”, una red de simpatizantes del yidahismo, quienes en 2012 fueron arrestados por intentar viajar a Afghanistan para integrarse a Al-Qaeda (una organización delictiva que practica el islam extremista). Más detalles sobre cómo colaboraba Márquez con este grupo no fueron difundidos.
La querella también indica que después de que Márquez se convirtió al islam en 2007, éste fue introducido a las ideologías radicales del yihadismo por su amigo Farook. Consecutivamente, ambos elaborarían planes para llevar a cabo atentados terroristas en el sur de California, específicamente en el condado de Riverside.
Los atentados jamás se ejecutaron, pero Márquez sí asistió a Farook y Malik en su atentado del pasado diciembre al proveerles las armas de fuego —dos fusiles de de asalto AR-15.
Márquez ahora se encuentra detenido. Son cinco los cargos por los que deberá responder: conspiración para suministrar apoyo material a terroristas, dos cargos por mentir sobre la compra de dos rifles (los que habrían utilizado los atacantes), fraude migratorio y dar falso testimonio en un supuesto matrimonio por conveniencia.
Farook, de nacionalidad estadounidense, y su esposa, Tashfeen Malik, pakistaní, presuntos seguidores del Estado Islámico (ISIS), fallecieron el 2 de diciembre, tras atacar un centro de asistencia para discapacitados en San Bernardino, donde mataron a 14 personas e hirieron a más de 20.
Outside of the United States, the insurance industry is divided into life and nonlife, or general insurance, rather than life/health and property/casualty. In total, world insurance premiums rose 3.7 percent in 2014, adjusted for inflation, after stagnating in 2013, according to Swiss Re’s latest study of world insurance.
Nonlife premiums rose 2.9 percent in 2014, adjusted for inflation, following 2.7 percent growth in 2013. Life insurance premiums grew by 4.3 percent after inflation in 2014, after having fallen 1.8 percent in 2013, adjusted for inflation.
The Insurance Information Institute (III) recently released its list of the top 10 countries ranked by life and nonlife direct premiums written in 2014 (in U.S. $ millions). Though the number one ranking may not be a surprise to many, the other insurance powerhouses across the globe have experienced intense growth and, for some, dismal weakening.
Longevity has been increasing over the past century thanks to medical advances and lifestyle improvements. Not only has the average life expectancy increased since 1900, but a larger number of people are living to older ages, driven in part by a steep decline in the high infant mortality rate that characterized the early 1900s.
Life expectancy once a person reaches age 65 is now about to 84 years of age in the United States and about 86 in Japan. Life expectancy in Australia, Canada and the United Kingdom fall between 84 and 86 for people at age 65, according to statistics from the Organisation for Economic Co-Operation and Development.
R. Dale Hall and Andrew Peterson of the Society of Actuaries detailed trends in longevity and factors that affect it at LIMRA’s Retirement Industry Conference earlier this month in Boston. The pair then introduced a new longevity tool, designed to help consumers and advisors estimate how long of a retirement they may need to plan for. Life expectancy likely will continue to increase but at a slower rate in the future, including at older ages, they said.
Hall and Peterson outlined several factors, based on data from the Institute and Faculty of Actuaries, associated with mortality that affect whether a person is likely to live to or beyond the average life expectancy. Multiple factors influence mortality and are important to consider in financial planning for retirement.
Here are nine factors that may impact mortality and longevity.
According to the Institute and Faculty of Actuaries, mortality rates for females are lower at each age than those of men. Women live longer than men, on average.
The current overall life expectancy for U.S. men is 76.4 years, and 82.9 years for men at age 65. Overall life expectancy for U.S. women is 81.2 years, or 85.5 years for women at age 65.
Some studies attribute this gap in part to riskier behavior among men that may lead to higher rates of accidents.
There appears to be a link between genetic factors and mortality rates. Genetics may play a role in nine of the top 10 causes of death, according to the Centers for Disease Control. The CDC lists the leading causes of death in the United States as:
Chronic lower respiratory disease
Stroke or cerebrovascular disease
Influenza and pneumonia
Intentional self-harm or suicide
Prenatal and childhood conditions
Poor conditions in utero, at birth and in very early childhood are associated with higher mortality even at advanced ages, according to IFA. The Society of Actuaries has been studying the impact of early childhood conditions on exceptional longevity, including whether growing up in a city or farm environment affects longevity, as well as whether growing up in certain geographic areas is associated with differing life expectancies.
Married people have lower mortality rates than those who were never married, are divorced or are widowed, according to IFA. Various studies suggest that marriage or committed relationships may improve cardiac health, help combat isolation and loneliness that can negatively impact mental health, and motivate people to make healthier choices like keeping regular doctor visits and giving up unhealthy habits.
As socio-economic status decreases, so does life expectancy, according to the IFA. Among other things, socio-economic status can affect a person’s ability to access adequate medical care and their participation in healthier lifestyle habits like exercising more, smoking less and maintaining a healthy weight.
Higher education levels are linked to higher socio-economic status and both are linked to improved longevity, according to Hall and Peterson.
For those with a bachelor’s degree or higher, life expectancy at age 25 increased by 1.9 years for men and 2.8 years for women, according to the CDC. On average, a 25-year-old man without a high school diploma has a life expectancy 9.3 years less than a man with a bachelor’s degree or higher. Women with a high school diploma have a life expectancy 8.6 years less than their counterparts with a bachelor’s degree or higher, the CDC said.
Higher education levels were also associated with lower levels of obesity and tobacco use, which may correlate with greater longevity, according to CDC data.
The CDC tracks data related to ethnicity and life expectancy. According to 2011 data compiled by the CDC, life expectancy is highest among Hispanic people — both male and female. Life expectancy ranged from 71.7 years for non-Hispanic black males to 83.7 years for Hispanic females.
Ethnicity or migrant status may also be associated with socio-economic status. Mortality of migrant people appears to vary as a result of differences in average mortality between host and home countries, as well as healthy selection for migration or return and length of residence in the host country, IFA said.
Historically, lifestyle factors that affect mortality include an unhealthy diet, inadequate exercise, tobacco use, excessive use of alcohol, risky behaviors, food safety, work place safety and motor vehicle safety. Today, the major lifestyle factor that affects mortality is obesity. Nearly 5 percent of adults are considered extremely obese, compared with about 1 percent in 1962; more than 30 percent are considered obese compared with about 13 percent in 1962; and nearly 70 percent of adults are overweight today compared with about 46 percent in 1962.
Advances in medicine and medical technology have had a major impact on increased longevity. Development of antibiotics and immunizations, as well as improvements in imaging, surgery, cardiac care and organ transplants all have helped push the average life expectancy higher.
I say this facetiously, of course. My editor — to whom you can submit your displeasures about this column at [email protected] — omits or rewrites most of my jokes and assertions that lack substance or relevance. Without her, I probably would’ve gotten myself in trouble with my sarcasm and accusations. So, to all the editors out there I say, thank you. Without you, we sometimes say silly things.
This line of thinking is precisely why I thought it would be fun to purchase a first edition, self-published copy of Dave Ramsey’s “Financial Peace,” published in 1992. I can only assume this was published prior to Dave having an editor. Without the protection of a knightly word slayer, Dave Ramsey makes dangerous statements that will live forever on paper. Statements I’m sure he wishes he could take back. Statements that make his current catchphrases — “12 percent rates of return” and “annuities are bad” and “bonds: who needs them?” — look as harmless as a newborn kitten on Christmas morning. So, grab some hot cocoa and a blanket and join me for some wintertime fun.
You’ve read different articles debunking Dave’s 12 percent proclamation. Some with lots of math and some that are hard to follow. I hope this doesn’t fall in that latter camp. As Dave Ramsey often touts, common sense can go a long way. So, we’re going to use actual returns from the S&P 500, starting the year his first book was published.
The predecessor to the 12 percent return
The real fun begins with a fact few are aware of: Dave hasn’t always believed in 12 percent returns. He hasn’t always used average rates rather than compounded rates. Prior to having an editor, Dave didn’t tell people to count on 12 percent; he told them to count on 18 percent. Today, he asserts the 12 percent rate with near certainty by citing past results and personal experiences as proof. But, like a doomsday prophet who uses Nostradamus writings as a formula to predict our last days, Dave recalculates and re-advises when the proclaimed date — or, in this case, rate of return — doesn’t come to maturation as prophesied.
Before I show how Dave’s first rate-of-return promise undermines his current claims, let’s look at another piece of contrary advice. Dave Ramsey has become famous, in part, for his seven baby steps. Baby step No. 1 is “Save $1,000.” It’s not enough! I’ve argued this ad nauseam. Dave is wrong with baby step No. 1 and he knows it. In chapter 8 of “Financial Peace,” we find proof of this. Dave writes that “a good financial planner will tell you that FIRST you should have three to six months of income in savings that are liquid, just for emergencies.” He goes on to say, “If you make $36,000, you should have $9,000 to $18,000 where you can easily get it BEFORE you do ANY other investing.” (All capitalizations were as written by Dave.)
Maybe you’re thinking that, way back then, Dave didn’t realize most people found it hard to save even $1,000. (By the way, $1,000 today was approximately $590 dollars in 1992, according to dollartimes.com.) We find out pretty quickly that this isn’t the case. At the bottom of page 64, Dave writes, “I know this seems like a lot of money, especially when most only have $1,000 in the bank now, but here is why the experts tell us we should save so much.” He goes on to explain why it’s important to save at that higher rate. So, Dave’s math is either wrong then, or it’s wrong now.
In other words, Ramsonites who cite how Americans are saving more under Dave’s influence do so with as much accuracy as Dave predicts future rates of return. By his own admission, he is now getting people to save either a) less than what he said experts stated was necessary or b) only about half of what they were in 1992. Neither of those seem like very promising scenarios.
OK, back to the story. Remember, we’re discussing why Dave doesn’t actually believe in a 12 percent rate of return. In fact, in my humble opinion, he didn’t truly believe in 18 percent way back then, and here’s why. In his 1992 book, Dave uses this example: A 25-year-old saves $1,000 one time and does not make any withdrawals. He writes:
“At 6 percent per year, you should have just over $10,000 at age 65; so, if we double the interest rate to 12 percent, you should have around $16,000, right? WRONG!!! You will have just over $93,000 at 12 percent at age 65. That is compound interest working for you and you see the multiplication effect rather than the addition effect that most may have thought.”
He then raises the rate to 18 percent, which he proclaims, “many good, solid mutual funds have.” At 18 percent, the end tally is $750,378.
Wait, so you’re telling me that the folks in, say, 1995 who read this book and then planned on an 18 percent rate of return are OK? I mean, Dave typically says, “Hey, if I’m wrong and it’s only a few points below, then they’re still OK, right?” He says us math nerds are arguing about a few inconsequential dollars. Hmmm. I’d love to live in a world where the difference between $750,378 and $93,000 was only a few dollars.
First, we must consider why Dave Ramsey changed his 18 percent rate of return projection. Eighteen percent is far more fun than 12 percent. It seems odd that he would change his mind on this, considering that he says mutual funds can easily make 14 percent (page 70). He even says that top funds have “averaged between 20 and 30 percent” over the last 10 years. OK, I went too far. I must be fibbing. Nope … you can find this fallacious statement on page 127 of “Financial Peace.” Like today, it’s hard to spot even a slight crack in Dave’s foundation of confidence surrounding the declaration of returns.
Given all of these confident statements, why does Dave use 12 percent now? Will he revise this number to be lower in the future?
The answer is simple: In every 10-year period since Dave wrote “Financial Peace,” the S&P 500, using annual returns, hasn’t matched the 12 percent promise, let alone the 18 percent. Based on the cold, hard evidence, Dave would have been forced to revise his 18-percent projection. I’ll get back to this, though.
A close look at the numbers
Let’s say the brazen Ramsonite who follows this path dreams of retiring with $300,000 in savings and investments. In order for this to be reality, the follower will need to save about $900 per month for the next 120 months (10 years).
Obviously, $300,000 isn’t very much, considering Dave often touts everyone should be able to retire a millionaire by saving nearly $1,000 per month. Saying things like, “Everyone should easily become a millionaire while saving nothing but 3 cents per day” sounds fun, but it’s akin to assuming everyone will drive slower in the snowy conditions of West Michigan in January. The reality is many won’t. But just for fun, here’s a chart with the annual return of the S&P 500 for each year since “Financial Peace” was published.
At first glance, the 12 percent rate — heck, even the 18 percent rate — looks like it might be true. But, oh, how the eyes can deceive. Has anyone else watched the magic tricks done on the sidewalks of the Vegas strip?
We’ve determined that our Ramsonite is saving $900 per month, right? When we’re adding money, the ending balance is affected by how much money we put in and, of course, by when we put it in. So, an account with a $100,000 balance and a 10 percent return is affected more than one with a $10,000 balance.
The charts below illustrate this. One shows each ten-year period and return, using the S&P 500 since “Financial Peace” was published. The second chart shows the ending balance of our hypothetical Ramsey follower investing $900 every month — no more, no less — for each 10-year period, same as before.
OK, so lots of math. Hopefully I didn’t give anyone paralysis of the analysis. What does this all really mean? It means this: At an 18 percent rate of return, the Ramsey follower would have $300,000, but, even at a 12 percent rate of return, they’d still have a bit more than $200,000 (using compounded, since, based on his quote above, Dave makes it clear that he’s referring to compounded). However, since publishing “Financial Peace,” the average 10-year compounded rate is only 6.01 percent per period. Furthermore, the average ending balance is less than half of what his readers in 1992 would have expected and that’s IF — a big IF — they followed the path despite seeing far less favorable results.
Let’s look more closely at this six percent. Do you remember the example I cited earlier? Dave used a 6, 12 and 18 percent compounded rate of return. The 6 percent was only $15,000. That’s a far cry from the nearly $750,000 excited readers would have counted on.
Why did Dave change from 18 percent growth to 12 percent growth? It’s simple: The 18 percent was horribly far off from reality. At Dave’s current 12 percent fallacy, he states that followers can withdraw 8 percent of the account balance each year because then they’re still making 4 percent. Oh, Dave, if only this were true. Below is a chart, again using just the plain old S&P 500. I used every 10-year period available after the initial 10-year period of accumulation. I also assumed the average 10-year balance from above $147,133, and used an 8 percent rate of withdrawal, or, in other words, $980 per month.
After 10 years, the average remaining balance is $86,780. But Dave claims that if you’re earning 12 percent — which you should at least earn, considering he used to proclaim 18 percent — and you’re only withdrawing 8 percent annually, then your balance will continue to grow. Fact or fiction? Clearly fiction. Not one 10-year period exceeded the initial principal amount. In fact, since 1992 this statement would only be valid six times (coincidentally, between 1992 and 1997 consecutively, and never since).
Editors help us from saying stupid things. For example, in the About the Author section of “Financial Peace”, Dave states that he “ … has held mortgage brokers and securities licenses.” From this we can infer that, by the time this book had published, his securities license had already lapsed. Twenty-five years later, with only a few years of industry experience that occurred prior to the Clinton administration (I hope I never have to qualify that as the “Bill Clinton administration …”), Mr. Ramsey proclaims to be an expert on something he’s not.
I thought about showing a table with more than 10 years of accumulation, or a table comparing rates of returns of fixed annuities and cash value life insurance (adjusted for cost of insurance), but then readers would have focused on whom they believe again. Instead, the intent here was to show everyone that, from the start, Dave has been projecting horribly inaccurate future rates of return — so much so that he was forced to significantly reduce future projections. Furthermore, the numbers show his current rate is still greatly exaggerated in comparison to the reality we’ve witnessed since he started his brigade. The math of the real time periods since Dave started shows he is wrong. Way wrong. Are you willing to trust him, simply because he’s entertaining? I’m not.
As a wise(ish) man with a few years of professional securities experience once wrote:
“Ignorance is not lack of intelligence; it is lack of knowledge on a particular subject.”
— Dave Ramsey, “Financial Peace” 1992.
As always, thanks for walking down this path with me. If you see something you’d like us to address from American’s “Favorite” finance coach, please email my editor at [email protected]
My senior year at Eastern Michigan University, I met with a counselor to make sure everything was in order for me to graduate. Apparently, it was not. I had never taken Math 118: Linear Equations.
“Isn’t there a way to test out?” I asked. Given that I had taken tougher mathematical courses in high school, I figured surely something could be done. Unfortunately, I was out of luck and had to take the course.
First test, 25 out of 25 — BOOM! But wait: That only equated to a grade of 50 percent. Shocked, I asked the teacher to explain. Turns out, it was simple. Half the credit was given for showing your work. “The answer is only half the problem,” my teacher said. “Sometimes the answer is correct, even when the steps to get there are invalid.” In other words, to prove your answers, you must be transparent about the theory behind them.
These words have stuck with me, all these years later. And I remembered them on August 12th, midway through the second hour of the Dave Ramsey Show. On this night, Dave did it again. He showed the world that his unique brand of Southern stubbornness simply will not die. He continued to attack whole life insurance, regardless of context or circumstance.
«Fortunately, I was provided a whole life policy at a young age,» Brett from Arlington, Texas says on the Ramsey Show. Now that he’s in his mid-thirties with a family, Brett feels he needs more coverage. He wants Dave’s advice on a term policy with a return of premium rider (ROP). Here I sit, car parked, right in front of my house. I had pulled into my driveway just as this segment got underway. I couldn’t get out. All I could think about was that Brett had said “whole life” and “fortunate” in the same sentence. “Dave’s not going to be happy,” I thought. “Oh, this will be fun.”
Of course, Dave quickly dismisses the ROP and tells Brett to buy a term policy without the feature. He gives a thorough and valid explanation as to why he believes this. Then — as if he were directly challenging me, like a news network moderator to an outspoken presidential nominee — he slams whole life policies and the entire insurance industry. He references Gerber Life, saying, «If you buy your life insurance from the same place you buy your baby food, you have a problem.» This is after he says that life insurance is the most gimmick-riddled industry of all.
«It’s not fortunate, it’s unfortunate,» Dave tells Brett about the whole life policy purchased for him when he was a child. «It’s a really bad product. The returns on investment are horrendous.»
But, what if this whole life policy is not an investment? What if we used it for its intended purpose … uh, what was that again? Oh, right: life insurance with premiums that will never increase and, just as important, a death benefit that will never decrease. What if — and this is a big one, stay with me —what if the premiums under the existing policy are lower than they would be under a new policy? What if premiums for a dreaded, horrible, waste-of-paper whole life policy were equivalent or actually lower than the suggested term policy? (Take this out of context and I’ll probably be losing some carrier appointments.)
I was going to grab my financial calculator to extrapolate the math. But then I thought, “Wait a minute, Mike, if your opponent doesn’t use a calculator, isn’t it an unfair advantage for you to do so?” So, for today, no calculator. I promise … sigh.
Alright, let’s do this.
I went to Mutual of Omaha and found a $50,000 whole life policy for $16.00 per month. Since interest rates were considerably greater 30–35 years ago, the monthly premium Brett pays is likely to be lower, despite the more favorable mortality tables used today. If I had my trusty calculator, we could make a reasonable adjustment for this, but I promised to shelve the calc. for today. If only there was another way to find out how much Brett was paying for the policy. How could we do such a thing? I suppose our host could’ve asked this question, but who has time for questioning a suspect we’ve already concluded is guilty? Best we can do, then, is go with the $16 per month premium we could purchase today.
Next, how much would a $50,000 twenty-year term policy cost for a 35-year-old male? Go to Zander.com and click on “instant term quote.»
Question 1: Date of Birth? Easy enough; let’s go with 1-1-1980.
Question 2: Gender? Another easy answer; male.
Question 3: Have you used any tobacco products in the last 12 months? I have no idea. Let me go listen to the radio archives found at daveramsey.com … nope, the question wasn’t asked. How can a financial professional advise against a product whose cost is undisclosed in favor of a product whose cost will vary greatly depending on tobacco usage? I’m sure this was just an oversight.
Question 4: Your health class? Another question we can’t answer. See, this is what happens when someone who is not licensed to counsel folks on proper financial decisions does just that. Mistakes are made. It’s a mistake to advise the replacement of a life insurance policy without asking simple qualifying questions. Ask any insurance agent how to determine the suitability of a life insurance replacement, and I guarantee they’ll do a better job than Dave does here.
Using the Zander term quote, I got $7.83–$21.18 per month for a non-smoker. If Brett does smoke, the premiums vary from $19.69–$44.94. Looking at these numbers, it seems very likely that this is another example of Dave giving harmful, financially impactful advice. Dave has now convinced poor Brett to pay more for life insurance in any of the following circumstances:
A. Brett doesn’t qualify for health class underwriting, which qualifies for the lower premiums.
B. Brett has used tobacco products in the last 12 months.
C. The actual premiums for the existing policy are lower than we assumed and are thus lower than the proposed replacement.
D. The cost of insurance (premiums minus the cash value component) are less than the proposed cost of insurance adjusted for the interest gained on the «invested difference.»
E. Brett’s need for life insurance exists past the term of the purchased policy, in which case the existing policy per thousand dollars of death benefit is certainly less expensive.
F. Brett becomes uninsurable, and the purchased policy is not convertible.
G.The policy is a dividend participating policy!
We cannot ignore letter G. How can we be so certain there are no dividends being paid? Can we assume this just because Brett said he’s taken over the policy? No. We cannot. As insurance agents, how many people have we met who continue to pay the premiums despite the dividends being great enough to offset the amount due? I personally can say I’ve seen this happen a lot. Today, many of the infant life insurance policies are non-participating. As a whole, participating policies have lost their market share, but in the early 1980s, this simply wasn’t the case. It’s very likely that Brett’s policy is a participating policy. This means we must add point G subset 1.
G.1.The death benefit is increasing due to dividends being applied as additional paid up life insurance.
Until a moment ago, we didn’t even discuss the possibility of dividends, which means we didn’t discuss the likelihood they were being applied towards additional paid up life insurance. On a small policy this isn’t expected to be much, but it’s certainly a point to take into consideration. Except that, in Dave’s world, it’s not. In Dave’s world, it appears that any cash value life insurance policy is suitable to be replaced as long as it’s being replaced with a term policy.
Maybe Brett is in good health and will qualify for the best underwriting class available, and maybe he hasn’t used tobacco in the last 12 months, and maybe the premiums for his existing policy aren’t lower than $16 per month. Maybe. Maybe not. But given the close proximity of the cost of both policies, even when considering the preferred underwriting qualification, the advantage must be given to the existing policy per thousand dollars of coverage. If Brett happens to be a smoker — which, again, any LICENSED AGENT would have asked — then, all other variables ignored, Brett will pay higher premiums for a policy which has increasing premiums after 20 years.
Many question why I believe proper licensing is important. Here’s why: Licensed agents are trained and regulated to make proper comparisons. Those who don’t make proper comparisons are not likely to be practicing for long. It’s time for “entertainers” to be regulated appropriately within the industries that require regulatory oversight. We must stop the permeation of unsound, biased, mathematically flawed financial and insurance advice given by those who are not licensed to give it.
Math 118 taught me some lifelong lessons. Like Dave, I can be stubborn. In order to show how ridiculous my professor’s request was, I decided to show work that had nothing to do with the answer. After all, the test was not multiple choice. Who’s lucky enough to guess 25 random consecutive correct answers? Furthermore, what was the probability it could be done twice? Surely, my professor would have to grade this test based on the validity of my answers, since I had placated his sophomoric request to show my work. I think you can guess what happened here. On the second test, I got 25 out of 25 again, but received another failing grade. Even when I knew the likely outcome of my actions, I proceeded along the wrong course simply to prove my point.
The difference: My actions only hurt me, not eight and a half million listeners. Dave does this with life insurance and with bonds, which we’ll address next month. In both cases, bad math equals bad advice, and bad advice influences people to make bad decisions.
Is Dave actually giving advice, though? Last month, IOWAGUY commented:
«I don’t know, going on TV and saying «here is what I would do» is not practicing. Does he sell them a policy or investment? No. I can tell a friend «If I was you, I would put that inheritance in a CD.» Does that make me practicing, if I don’t sell them a CD or get paid for suggesting it? No. You can argue if the advice is good or bad, but just talking with callers does not make you practicing. Peace to all.»
I was going to reply within the comments, but this was worthy to share with everyone.
In regards to life insurance, how many people listening have now decided to surrender their cash value policies without doing the math, since Dave, with great charisma, has advised his listeners to do so? How many people have been duped into thinking a balanced fund is «very conservative» (see next month’s column)? Moreover, Dave refers to himself explicitly as ‘America’s most trusted source for financial advice.‘ So, before anyone says Dave’s not really giving financial advice and therefore shouldn’t be regulated, please check out this citation.»
Next month, we’ll grab the financial calculator and dispel Dave’s bad advice on bonds with math and a dash of wit.
As always, thanks for walking down this path with me. If you see something you’d like us to address from American’s “Favorite” finance coach, please email my editor at [email protected].
Before the tax advantages, before the investment elements, before a single fancy riderhad been dreamed up, the need for life insurance was recognized and honored. This is a product that can be traced all the way back to ancient Rome, where military leaders established guilds called “benevolent societies” to cover funeral expenses and living costs for the families of deceased members. From these simple roots, the tool has blossomed into a complex product line that protects consumers from any number of financial risks.
Today’s life insurance carriers sell hundreds of products, serve millions of clients and bring in billions in revenue. But many of them got their start as small family companies, built from the ground up by smart businesspeople committed to filling a specific market need. As we look ahead to Life Insurance Awareness Month, we share the inspiring stories of 10 of today’s most prominent life insurers.
The real, live Aflac Duck takes a first look at the red carpet as he celebrates the company’s debut as an official partner of The GRAMMY®s. (Eric Reed/AP Images for Aflac)
American Family Life Insurance Company of Columbus was born on November 17, 1955. Brothers John, Paul and Bill Amos entered the Life Insurance market with 16 employees and 60 agents. After their first year of operation, they had over 6,400 policyholders and $388,000 in assets. This early success allowed them to expand into a new market: In 1958, they pioneered cancer insurance to help ease the financial burden faced by cancer victims and their families.
By 1970, the company had changed its name to American Family Life Assurance Company of Columbus, and was licensed in 37 states. In 1974, Aflac first ventured into international sales, becoming the third U.S. insurer to set up shop in Japan. That same year, Aflac was listed on the New York Stock Exchange, opening at $7.25 per share.
People pass the AIG building, in New York, Tuesday, Jan. 8, 2013. (AP Photo/Richard Drew)
As the 42nd largest public company in the world, American International Group (AIG) is most often associated with its corporate headquarters in New York City. But the company first opened its doors 7,500 miles away in Shanghai. In 1919, American Cornelius Vander Starr started a two-room general insurance agency in the maritime city, called American Asiatic Underwriters. Two years later, Starr added a life insurance operation; six years later, he opened branches in Hong Kong, Vietnam and the Philippines. In 1926, the firm set up an outpost in New York, which was established as the world headquarters in 1939. The company continued to expand overseas and, in 1967, all operations were collected under the umbrella organization American International Group, Inc.
Axa insurance company CEO Henri de Castries poses after the presentation of the group’s 2008 full year results, in Paris Thursday, Feb. 19, 2009. (AP Photo/Christophe Ena)
Success came almost overnight for the Equitable Life Assurance Society of America, founded in 1859 by Henry Hyde. By the time the insurer turned 10, it was writing more new business than any other company in the world. Luxe accommodations followed: Equitable’s corporate headquarters in Manhattan was the first office building to use steam elevators; by 1879, it occupied the tallest office building in the world at the time.
From a product standpoint, Equitable was also a trailblazer. By the early 1880s, the company began marketing the first joint and survivor annuity, and established the practice of paying death claims immediately. In 1976, it pioneered the sale of variable life insurance products.
In 1992, with the sale of a major stake of company shares to French insurer AXA Group, Equitable converted from a mutual to a stock company and became a member of the Global AXA Group.
The Germania Life Insurance Company Building, now the W Union Square Hotel. (AP Photo/Mark Lennihan)
It seems fitting that Delmonico’s, a legend in the Manhattan dining scene, was also the setting for the founding of one of the legendary players in the insurance world. In 1860, 21 prominent German-American businessmen gathered there to build the Germania Life Insurance Company of America. Civil rights lawyer Hugo Wesendonck led the group, whose original business model was to cover the growing wave of German immigrants arriving in the United States. In its early years, the firm kept strong ties to its German heritage and, in 1868, became the first U.S. insurance company to start an agency in Europe. The company’s European presence grew steadily until World War I, when it was forced to exit the market. Rebranding soon followed: In 1918, the company changed its name to Guardian Life Insurance Company of America.
An unidentified employee of Lincoln National Corp. exits the company’s headquarters, Monday, Oct. 10, 2005, in Philadelphia. (AP Photo/Joseph Kaczmarek)
Lincoln National rose to join the ranks of elite insurers after the life insurance boom of the mid-19th century, conceived by a diverse and well-connected group of founders. On June 12, 1905, the company opened for business on the second floor of a bank in Fort Wayne, Indiana, backed by a collective of bankers, attorneys, wholesalers, hoteliers, manufacturers, physicians and brokers. Perry Randall, a Fort Wayne attorney, proposed the name “Lincoln” as a symbol of integrity.
The name became a powerful part of the company’s early branding and community outreach. Two months after the company’s launch, Robert Todd Lincoln provided a photograph of his father and authorized its use for company marketing efforts. In 1928, Dr. Louis A. Warren, a Lincoln scholar, joined the Lincoln National staff; that same year, the company opened the Lincoln Historical Research Foundation, home to one of the largest book collections about the late president in the United States.
In its first decades of operation, the company grew through a number of acquisitions, including Michigan State Life in 1913, Pioneer Life in 1917 and the Reliance Life Insurance Company of Pittsburgh in 1951.
The MassMutual Life Insurance Co. building (Wikimedia Commons)
In 1851, Connecticut life insurance agent George Rice raised $100,000 in capital to fund a mutual life insurance company in Springfield, Mass. Early policies restricted working near a steam engine, traveling south of Virginia in the summer and ocean voyages, though perhaps they weren’t quite restrictive enough; the first death benefit of $1,000 was paid to Charles Desotell, a gold seeker who died on a ship bound for San Francisco.
By 1865, the young company had already won assets under management of $1 million. By 1917, that number had grown to $100 million, and the company also began offering annuity products. Fifteen years later, this growing profitability allowed MassMutual to relieve some of the hardship of the Great Depression: The company issued 60,000 loans to hurting policyholders in the early 1930s, totaling more than $26 million.
In this photo taken Thursday, June 4, 2009, a woman works on a computer at the Metlife insurance office in Mumbai, India. (AP Photo/Rajanish Kakade)
Today, MetLife is the No. 2 writer of life insurance premiums in the country, but the company was once a small player in a crowded marketplace. Founded by a group of New York City businessmen in 1863, the National Union Life and Limb Insurance Company began business in July 1864 insuring Civil War sailors and soldiers against wartime-related disabilities. By the end of that year, the company ranked dead last among the 27 carriers doing business in New York, having written just 17 life insurance policies and 56 accident policies.
Five years and several reorganizations later, President James R. Dow and his board of advisors abandoned the casualty business to focus solely on life insurance. The Metropolitan Life Insurance Company opened its doors on March 24, 1868 with six employees. It faced intense competition from a handful of well-established life insurers operating in New York, and struggled to grow throughout the 1870s.
By 1879, new MetLife president Joseph F. Knapp noticed the success his peers across the pond had found selling “industrial” insurance programs (essentially final expense life insurance). Knapp imported British agents to train his American sales force, and within a year MetLife was selling 700 industrial policies each day. By 1909, MetLife had risen to become the No. 1 life insurer in the country in terms of policies in force.
The former New York Life Insurance Company Building, also known as the Clock Tower Building, at 346 Broadway between Catherine and Leonard, was expanded from the original building by Stephen Decatur Hatch and McKim, Mead & White, between 1894 and 1899. (Wikimedia Commons)
New York Life
Founded in 1845 as the Nautilus Insurance Company, New York Life has built a well-deserved reputation as an industry trailblazer. In 1848, 15 years before The Emancipation Proclamation, company trustees made the decision to halt the practice, widespread at the time, of selling policies insuring the lives of slaves to their owners. In 1860, the company pioneered a non-forfeiture option — the predecessor to today’s cash value benefits — ensuring that a policy would stay in-force if a premium payment was missed. The company was also the first to distribute a cash dividend to policyholders.
Later in the nineteenth century, New York Life became the first U.S. life insurer to issue policies to women at the same rates as men, counting Susan B. Anthony as one of its early female policyholders. In 1896, the company rolled out coverage for people with disabilities, another industry first.
In this Aug. 2, 2005 file photo, a Prudential Financial sign on the marquis tells customers the company is inside an office building in Salt Lake City. (AP Photo/Douglas C. Pizac, file)
The year is 1875. The scene is a basement office in downtown Newark, N.J. Here, insurance agent John Fairfield Dryden founded The Prudential Friendly Society with the intent of providing affordable final expense coverage to the working class. Weekly premiums for these policies were as low as three cents.
The demand for this level of coverage was high. In less than five years, the company had reached $1 million in assets, and expanded its client base to include the growing middle class. In 1885, the one-millionth policy was sold to John Dryden.
Other notable milestones: In 1876, Prudential hired the first female life insurance agent, Julia Babbitt. One year later, they rebranded to become The Prudential Insurance Company of America. And in 1898, the company granted a concession to policyholders, waiving premiums for those serving in the Spanish-American War. By 1923, less than fifty years after the company’s birth, Prudential’s assets had reached $1 billion.
The Transamerica tower, at left, is framed by the Golden Gate Bridge at sunrise in a view from the Marin headlands, Monday, Feb. 23, 2015, in San Francisco. (AP Photo/Marcio Jose Sanchez).
Transamerica’s history is rooted in the stuff of American Dreams. In October 1904, second-generation immigrant Amadeo Giannini founded the Bank of Italy in San Francisco. Housed in a converted saloon, the bank’s mission was to serve immigrants other banks would not serve. A year-and-a-half later, the institution stepped up to fill another need: providing loans to victims of the 1906 San Francisco earthquake, allowing them to rebuild what they had lost.
In 1928, the company grew through a merger with Bank of America and, two years later, acquired Occidental Life Insurance Company through Transamerica Corporation. The banking business split from the life insurance business in 1956, with the life entities taking the Transamerica name. In 1999, Dutch financial organization Aegon N.V. acquired Transamerica for $10.8 billion, although the company continues to transact business in North America under the Transamerica name.
The dangerous lie Dave Ramsey tells about cash value life insurance
Jul 20, 2015 | By Michael Markey
Numbers fascinate me. Patterns and coincidence puzzle me. The other day I was in a meeting, sitting across from one of those leg-crossing men. I sat there, captivated not by the conversation but by the way he’d flick his left foot towards the ceiling no more than three times before lifting the heel of his right foot, allowing his right knee to act as the fulcrum for his bobbing left foot. I was able to predict with near certainty when he’d lift his foot to break the sequence. This was all done in my head, of course, as I suspect no one knew I was terribly bored and annoyed. Was he purposely doing this, or was the behavior so natural he was unaware of the predictability of his actions?
We are all creatures of habit, but bad habits can be harmful. Dave Ramsey has a bad habit of giving harmful advice to any caller who asks about cash value life insurance or more conservative investments.
On July 10th, 2015, the host of «The Dave Ramsey Show» gives very bad advice to two separate callers regarding separate issues. Dave causes thousands of dollars of harm to one caller by suggesting she cash out a cash value life insurance policy; with the other caller, he reveals his lack of understanding of bonds by suggesting a money market account to be superior. Like the leg-crossing man, Dave is a creature of habit. He gives cancerous advice over and over again.
Today we’ll disprove Dave’s recommendation that a couple cancel their cash value life insurance policy with math, fact, and a bit of sarcasm — uh, I mean wit.
Here’s what Dave says to the caller who owns the cash value policy — a universal life (UL) policy issued by Mutual of Omaha (MOO), to be more specific: «Yes, I would cancel this garbage,» said Dave, «[It’s] one of the worst products I’ve ever heard of … you got burned; you got fried.»
The caller, a 50-year-old women, had just finished describing how she and her 55-year-old husband had eight years ago purchased a 20-year UL policy, which had a return of premium rider (ROP) at maturity. She questioned if this was a good idea, since they aren’t good savers and this would act as a forced savings plan. It doesn’t appear they thought this was a bad choice prior to becoming Ramsey followers. They had now paid $26,400 into the policy. If they continued to pay $3,300 for the next 12 years, they’d pay a total of $66,000 into the policy, but would be refunded $66,000. In other words, pay another $39,600 over 12 years to get a payment of $66,000. This is the contractual guarantee of the insurance policy based on the claims-paying ability of the insurer, not a hypothetical value based on aggressive assumptions that are likely to be overly allocated into particular market segments due to overlap.
Now, let’s discuss how much they can receive to cash out the policy right now. It’s just about enough to go buy a rusted-out van without windows: $2,400 according to our caller (for the insurance product, not the van).
Fifteen minutes into the meeting with the leg-crossing man, he stopped. Excitedly I watched — remember, I was quite bored — as he switched from his left foot to his right foot. His pattern changed. He went up to five foot flicks before doing a heal raise. Are you serious?! You can’t change the pattern. Yet he did.
Dave, with his southern roots of stubbornness, has never shown a propensity to change. But this time, July 10th, 2015, I actually thought Dave was about to do just that. He talked with the caller and seemed to be crunching the numbers with his imaginary financial calculator. (I assume he doesn’t own a financial calculator, given his consistently bad math and cynical criticism of those who «punch numbers.») I thought, Dave’s going to go against his heart. He is going to do what he instructs his callers to do. He will use his head and tell her to keep the MOO policy. But, as the famous saying goes, «When all you have is a hammer, then everything you see is a nail.» And Dave hammered the screw into the wood until it bent over and wouldn’t go in any further.
Dave tells the caller to cancel this thing out, to invest the $3,300 into «good» growth mutual funds and to do so in a Roth IRA. Dave gave advice he’s not licensed to give when he suggested the caller replace, finance or terminate an existing life insurance policy and instead invest those premiums into securities. Given the regular and consistent recommendation to implement his advice through one of his endorsed local providers (who, as discussed in an earlier column, pay a fee to Dave for these referrals), regulators must not continue to allow such devastatingly incorrect dribble to be broadcast without consequence.
Enough with the verbal argument; it’s time for the … dun dun dun … math. You knew I’d eventually pull out my nerd machine. OK, here we go. The first set of math is easy: Continue to pay $3,300 for an additional 12 years and get $66,000 back, with no risk other than the (very unlikely) financial default of one of the oldest and largest insurers in our industry.
The next set of math takes a bit more work. Right now, the couple pays the premiums annually by using their tax return refund. Dave says to adjust their withholding to eliminate the refund. Then, he recommends that they set up an auto draft to invest each month. Take the $2,400 cash value and invest that, too. If you want to follow along with me using your HP 10bII+, then here are your inputs:
$2,400 PV (present value), 1% I (interest), 144 N (number of periods; 12 years times 12 months per year).
Using the one percent interest per term input given above, we get a hypothetical return greater than Dave’s famously inaccurate, inept, cancerous 12 percent assumption, since ours is NOT an average annual rate. Input $275 under PMT (payment), and you get ninety three thousand.
But, wait a minute … bad math equals bad advice. Our couple won’t have $275 to invest, oh no. There are several deductions we need to make before arriving at our investable number. First, our couple will be without life insurance. Dave and I BOTH believe in the value of life insurance. Dave counsels his followers to purchase life insurance at a value of 10x income, or, in the case of a stay-at-home parent, $400,000. (I use “counsels,” since, not being licensed, he is careful to avoid using the word “advise.”) Not knowing what our couple makes, since Dave did not ask, I used Dave’s $400,000 number. (For your consideration, you should also know he did not ask how much debt they have, nor how much they have for emergency savings.)
Anyway, back to the rabbit hole. We need to know how much to deduct from the $275 of monthly premium. Where could I find a reliable quote from a company Dave trusts? Ha! I went to Zander insurance agency, «the only company,» Dave trusts. I used their simple and consumer-friendly online calculator. (Seriously, it was an easy process; I give kudos where kudos are due.) Lastly, in an effort to give Dave’s bad advice every advantage, I assumed our mid-50s couple would qualify for the absolute best non-smoker health rating, even though I’m not sure what kind of health they’re in. Do you know why I don’t know what kind of health they are in? Because the popular radio show host was more concerned with bashing a reputable company and a particular type of product than he was with getting the facts.
Now, imagine my surprise when I saw the company who had the lowest rate among the quotes provided by Zander. It was comical to see our friends in the wild kingdom, United of Omaha, perched at the top of the winner’s circle. (For readers who are not insurance people, United of Omaha is part of Mutual of Omaha.) The rates for a 10-year term policy were $31.72 and $64.62 per month. So, rather than having $275 to invest per month, our couple only has $178.66 to invest per month.
Now that we have our input for PMT, we can solve for FV (future value). Hit the button and we get sixty seven thousa … dang it, I forgot another detail. Dave recommends the use of front-end load (this means commission) mutual funds. He recommends you do this over four fund types: growth, growth and income, aggressive growth and international. Amazingly, this isn’t seen as advice, since it’s not specific to the particular fund.
I want to get back to the math but we need to first take a little field trip. Don’t worry this will be f-u-n, fun.
Dave often says that if we flip a question so that we use our brain and not our hearts, then the answer will become clear. For example, he’ll ask someone who wants to invest $10,000 rather than use it to pay off $5,000 of interest-free credit card debt whether they would still think it was a good idea if we flipped the question around. Meaning would they, with no debt, take out $5,000 on a no-interest card to invest in the market. Everyone says, of course not. Dave smiles and tallies up another victory on his wall of glory. So let’s do the same, shall we?
Imagine if Bernie Madoff, who’s clearly barred from the securities world — as well as the free world, for that matter — were to develop a newsletter from his posh 8×8 Italian brick cell. Bernie’s newsletter preached how to make sure you’re not investing in a Ponzi scheme. Next, imagine that after enough positive public brand equity, Bernie were to create a system in which he could make money by referring his followers somewhere. I’m not too creative, so why don’t we just say he calls it Bernie’s Accredited Representative of Finance (BARF for short). Like Dave’s followers do with ELPs, Bernie’s followers could meet with a BARF advisor to invest in financial products. Our BARF founder would be paid a fee for each referral.
I’m not saying ELPs are anything but wonderful. I am saying that Dave is giving advice he’s not licensed to give, and that he should be held accountable. Currently Dave says whatever he wants. Since he’s not providing financial or insurance advice, he’s not under regulatory authority. And here’s where it gets fun. Would you say the same thing about Bernie’s BARFs? Would you agree that it’s not Bernie giving the advice, it’s his BARFers that are giving it? Our brains tell us this wouldn’t be right, and that regulators should step in to prevent such … what is the phrase I’m looking for … ah! … such parasitic, cancerous advice from being given.
Yes, more math
Here’s the last round of math. Brace yourself.
Our couple doesn’t have $275 per month to invest, nor $178.66. After deducting 5.75 percent for commissions, they only have $168.39 to spend. Solve for future value and we get $64,631. Are you kidding me? Dave «counseled» our couple, without knowing how much they have saved, without knowing their health, without knowing how much debt they have and without knowing their income to give up a guaranteed amount of $66,000 with no risk other than the default of MOO. He said to instead invest those dollars into an allocation of securities, which has a large potential for over-concentration into particular market segments and which is arguably more risky than the contractual minimum obligation of the «horrid» UL policy. Moreover, even at a compounded annual growth rate that exceeds the inexcusably deceitful, overly optimistic number he undoubtedly uses himself, this investment comes $1,369 shy of what our couple could’ve had, had they only not taken a bite of the forbidden fruit. In the words of my friend Jim Carey when playing Ace Ventura, «lah-who’a-zer.» (By the way, I’m not actually friends with Jim, but I would certainly consider accepting a friend request from him on Facebook.)
You might remember that I had planned on discussing how Dave gave equally bad advice to another caller on the very same show. But we are out of space; I already get yelled at over my word counts. We’ll circle back to that tragedy next month. Besides I need to keep some content in reserve for future columns … er … who am I kidding? As long as Dave keeps being a creature of habit, I’ll never run out of inaccurate advice void of proper mathematical footing.
As always, thanks for walking down this path with me. If you see something you’d like us to address from American’s “Favorite” finance coach, please email my editor at [email protected].
Why Dave Ramsey is wrong about permanent life insurance
By Michael Markey.
It’s absolutely, unequivocally, undeniably, inexplicably clear Dave Ramsey does NOT believe in permanent insurance. He believes there’s no need for life insurance when you have no mortgage, no debts, and have saved hundreds of thousands of dollars earning 12 percent “average” annual returns.
Dave tells his followers to be intentional with their money. Is it possible Dave is intentional with his wordings? Is it possible Dave himself would’ve been better off owning permanent insurance rather than term? Is it possible Dave is wrong about 12 percent annual returns (which is another primary reason he advises term)? Is it possible there’s a perpetual need for permanent insurance for some people, and that permanent insurance provides increased liquidity and spending capability in retirement?
The math proves yes.
Permanent vs. term: A mathematical analysis
A while back I stumbled upon an episode of Dave’s TV show in which he read an email from a listener named Tyler that posed the following question: How can you advise term insurance when it expires just when people need it the most? In response, Dave tried to insult Tyler, saying he sounded like a true life insurance salesman. Dave goes on to explain that he recommends term because when it expires his followers will have no debt, no house payment and hundreds of thousands in savings.
As the rant continues, Dave accidentally reveals one reason why permanent insurance can be better. It’s not about the level premiums or the internal rates of return or estate taxes or income replacement as my compadres (as one reader referred to us last month) have vehemently argued in the past. It’s about security. Insurance equals security, and the security of death benefit proceeds doesn’t completely or necessarily evaporate with the elimination of debt and/or creation of wealth.
Dave has said, and I quote: “I’m 47 years old and still carry a few million in term insurance because SWI.” He gets this southern boy grin and explains, “SWI is because Sharon wants it.” (Sharon is Dave’s wife.) He goes on to say that it’s more important to have the coverage than it is to put something new on her finger.
Now, this is where we get to have some fun.
Let’s look at the math between permanent and term for a hypothetical 40-year-old. We need a name for our mystery man. Let’s call him Dave, shall we? We’ll compare Dave buying a 20-year term policy at ages 40 and 60 versus buying a guaranteed universal life policy (GUL) at age 40. With the term scenario, we’ll assume he invests the saved premium into the market. We’ll break down the comparison with the following gross rates of return rate: 6, 8, 10, and 12. We’ll factor 1 percent for annual expenses and front end sales charges of 5.75 percent. Lastly, we’ll review if being half wrong on the rate of return equals out to half the value. (Your guess is as good as mine, unless of course you’re guessing yes … then your guess is half as good as mine.)
I ran the rates through a life insurance quote engine and took the median price for each age bracket, assuming the best underwriting health class. Keep in mind that I’m giving a huge advantage to term here, since it’s more likely for a 40-year-old to qualify for best class underwriting and less likely for a 60-year-old, which is the attained age for the second term scenario.
Using today’s rates, our 40-year-old Dave can get a $2M-death-benefit, 20-year term policy for around $1,345 per year. The 60-year-old Dave could purchase the same policy for $9,830. In comparison, our 40-year-old Dave could purchase a GUL for $10,170.
This means the 40-year-old term-buyer can invest $8,317 after sales charges into four different Class A “good growth” mutual funds. (Remember I’m only referring to our hypothetical Dave, not the real Dave. Use the math as illustrative and inspiration to do the math. Side note: One thing the real Dave and I agree on: Being intentional with our wordings is impactful.)
The 60-year-old Dave only has about $320 of saved premiums to invest per year.
I’ve also assumed that once every 10 years we’ll want to completely rebalance the gains in the portfolio. This would create capital gains and additional sales charges. In other words, we have a portfolio turnover rate of once every 20–30 years, since we’re only rebalancing or reallocating the gains.
Here’s how the chart looks for each at 10, 20, 30 and 40 years.
Years / (hypothetical Dave Age)
5% Net Rate of Return
7% Net Rate of Return
9% Net Rate of Return
11% Net Rate of Return
10 / (50)
20 / (60)
30 / (70)
40 / (80)
Dave yells at financial people like myself for hurting people with our “theories” and lack of real world experience helping people. He jokes about how we grab for our HP calculators. Well, my HP calculator proves his math wrong. Even at a gross 10 percent compounded annual growth rate (CAGR) you have nearly $600k less than the death benefit of the life insurance in 40 years.
Who wants 10 percent when they can get 12 percent? The 12 percent Dave uses is an average rate, not a CAGR (see Stoffel vs Ramsey). Ten percent CAGR for the S&P 500 is more mathematically valid than 12 percent. Remember that stock price reflects growth, which is partly a byproduct of inflation. The currently higher CAGR includes higher inflationary periods, which, during lower inflationary periods like we’re in now, equates to lower CAGR. Hence, the long term 12 percent math is flawed. Warren Buffett expects CAGR to be closer to 7 percent due to the lower inflationary period we’re currently in.
Dave’s math is further flawed given two things:
First, the majority of the savings between term and GUL is during the first 20 years, not the second. Thus, a lower CAGR during this period would greatly reduce the outcome.
Second, the death benefit of the life insurance is guaranteed. It’s not hypothetical. It’s a risk-free $2M benefit (oh, and tax-free,too … the numbers above don’t account for any estate taxes). Now, what would the risk adjusted return of the S&P 500 be? I’ve seen that number to be less than 5 percent. In fact, one of our readers who is an actuarial statistician wrote to me personally and showed how he got 4.91 percent. (Thank you, Anthony!)
Side note: Ever wonder why at 12 percent returns anyone would pay off a mortgage? One reader last month sent in an audio clip where a millionaire asked why he should pay off his 4 percent fixed interest rate mortgage. In summation, Dave said the 12 percent has risk and being debt free changes your mindset. (Thanks for the clip, William!) Shouldn’t this be the same argument with permanent life insurance? The death benefit is guaranteed, whereas the discipline to save the additional premiums, the rate of growth and the number of years to grow are not guaranteed. Hence, the additional risk outweighs the possible additional benefit.
Those who practice personal finance and make plans for an individual’s specific situation are held accountable to the mathematical results. We use calculators to examine the results. In the Total Money Makeover, on TV, and on the radio, Dave often proclaims that even if he’s half wrong, he has still helped his followers. Just like term insurance isn’t better 100 percent of the time, this conclusion isn’t 100 percent correct. It’s nowhere close, in fact. If the math is half wrong, if 12 percent gross is actually 6 percent gross — which is 5 percent net after the 1 percent fee — then the person who followed this advice would’ve bought term, invested the difference, and been left with $1.4M LESS than the $2M death benefit in 40 YEARS.
Let that sink in for a minute.
The cost of security
The real Dave Ramsey owned term insurance at age 47, and showed no regrets about owning it, nor any indication his term insurance ownership years were coming to an end. If the real Dave had bought permanent insurance at age 40 right now, he would be better off at age 54. He would be better off through his early 80s, even at a 10 percent gross rate of return. He would be better off not because of the internal rates of return, but because of his family’s desire for security. See, we make the mistake of believing that at $1M of liquid savings we’ll be secure. When $1M is your new normal, then $1M is where you feel secure. Then it’s $2M, then it’s $4M, and so on. Once you have what you’ve got, you don’t feel comfortable going backwards. Losing your spouse financially means the reduction of income, whether by the elimination of wages, pensions, or Social Security. Life insurance provides security against this.
Now some of you may argue the GUL premiums don’t cease at age 80, whereas if we see a 10 percent gross CAGR then the saved insurance premiums plus interest have matched the desired security blanket somewhere past age 80. You’re right; you pay the GUL premiums until you pass. This may be prior to reaching 80, or it may be later. But I think this was a fair comparison. If you want to squibble about it, then let’s squibble over the rate of return, as well. Anyway, to prevent future squibbling I ran a 10 pay GUL policy starting at age 40 and paid up at 50. (And don’t yell at me about “squibble” not being a word. It’s not. I made it up. I took a page out of Mr. Ramsey’s book: see investing advisor.)
We accounted for the cost of term insurance during the different age bands based on the rates assumed earlier. The first table below shows term insurance ending at age 60; the second shows it ending at age 80.
Term ending at age 60
Years / (hypothetical Dave Age)
5% Net Rate of Return
7% Net Rate of Return
9% Net Rate of Return
11% Net Rate of Return
10 / (50)
20 / (60)
30 / (70)
40 / (80)
Term ending at age 80
Years / (hypothetical Dave Age)
5% Net Rate of Return
7% Net Rate of Return
9% Net Rate of Return
11% Net Rate of Return
10 / (50)
20 / (60)
30 / (70)
40 / (80)
Again, the glaring point here is that being half wrong on the rate of return doesn’t equate to the outcome being half as much! This is why we use calculators and not blank statements or simplistic math that isn’t valid. (Thanks, HP calculator.) Furthermore, if you argue the first chart is more accurate since if you save the money you’ll no longer “need” the insurance, remember the mathematical need is not the same as the behavioral reality to maintain the additional security. Lastly, the ending amounts do not account for estate taxes, which certainly do change from time to time and would make the tax-free benefit of life insurance more attractive.
Building an estate with life insurance
I noted earlier that life insurance can be used to create an estate. It doesn’t sound like a radical assertion, I know, but it goes against what Dave says.
On July 14th, 2014 a reader asked Dave if his 71-year-old mother should continue a universal life insurance policy she purchased to leave an estate, or if there was a better investment alternative. Dave answered this: “…You don’t use life insurance to leave an estate. It’s a bad idea. You leave an estate by saving and investing. The only people who will tell you to use a life insurance policy to leave an estate are life insurance salesmen.”
Wrong! Just plain wrong. Many individuals benefit from using life insurance in an estate. Let’s call our 71-year-old woman Betty. Like many of her generation, Betty has plenty of income from Social Security and pensions, but has relatively lower invested assets. At this point she’d like to make sure she leaves an estate. How would this be a bad thing? Earlier I mentioned the show where a caller asked why he should pay off his mortgage, since earning 12 percent growth is much better than 4 percent paid in interest. Dave replied that if your house was paid off and you were told to take out a mortgage and invest the proceeds, you’d think that was nuts. What he meant was that the security of having one’s house paid is greater than the potential additional interest made through leveraging. As our examples illustrated, the security of a known amount is better than the potential interest made through leveraging one’s need or desire for death benefit proceeds with volatile 100 percent stock investments made over the course of many years.
Here’s a shortened version of Dave’s response to Betty’s investment dilemma: “It would probably take about 13 years for the money to turn into $250,000. Assuming she’s healthy, I’d rather do that and bet on her living. That way, she can leave an estate and avoid the expense and rip-off part of the universal life policy.”
Interestingly enough, my HP calculator found that Dave’s right: It would only take 13.75 years to accumulate $250,000 if I input a 12 percent CAGR. But Dave has stated he understands the difference between compounded and average. He has also stated that he uses the 12 percent “average” rate to inspire and illustrate the power of compounding interest (once again see Stofell vs Ramsey). Yet when we do the math here, he’s using his standard go-to number of 12 percent, but in CAGR function not averaging. (There are plenty of examples online which will show how the math differs. Just use Google.)
Here’s the problem. First, when you use different growth methods at different times and don’t differentiate, it becomes very hard for people to know what you mean. Second, the average life expectancy for a 71-year-old female is 15 years (15.6 years, to be precise). So, what if Dave is half wrong? What if she earns only 6 percent before fees? Then it takes a bit over 20 years. If we account for the same tax and rebalancing as earlier, then it’s nearly 24 years. Furthermore, this assumption puts a portfolio which exceeds the average risk tolerance for most 71-year-old individuals. Therefore, even if the math is correct, it’s improbable that our Betty will maintain this course during adverse periods.
Think of it this way: When Betty first starts putting money away, she can be riskier with these funds. As the balance accumulates and her life expectancy decreases, it’s reasonable to conclude she’d want to scale back on risk. It is one thing to experience a downturn after year three or four, when there’s only twenty to thirty thousand dollars at stake, but when the number is bigger — say a hundred thousand or so — then a sizable downturn has a greater impact, especially when you consider her life expectancy has decreased. Will she live long enough for the benefit to come back? Will she continue to save and invest during this period?
The importance of income replacement
Lastly, let’s look at income replacement. Let’s talk Social Security for a moment. A few years ago we started to notice a trend. I noticed that married spouses rarely pass away in the same year. Mind-blowing information there, I know! When the first spouse passes, the surviving spouse (assuming they don’t remarry) is taxed as a single individual the following calendar year. The surviving spouse also loses the smaller of the two Social Security benefits and possibly some pension income, but let’s ignore that.
Here’s an example: Let’s say that Bob and Mary get $3,000 per month from Social Security combined. Bob gets $1,800 and Mary gets $1,200.They take out $1500 per month from their IRAs to supplement their income. They have no debts. They just like to live life, travel some, and help out the kids or grandkids where they can. In short, they’re a normal couple. Approximately $500 of their Social Security benefits are taxed. No big deal. Their adjusted gross income is $18,500 and standard deductions should wipe out all of their federal income tax liability.
Bob dies. And here’s the trend we’ve noticed. Spending doesn’t drastically change. Mary still wants to do the things she did while they were together. She still wants to give or help out the kids, do a little traveling, and live life. There are a few bills that are eliminated from Bob’s death, say a Medicare Part B premium, a car insurance, a supplemental insurance, and a cell phone bill. But overall, two do not spend much more than one. After Bob’s death, bottom line expenses change by less than $500 per month. Mary’s new Social Security benefit is only $1,800, and her monthly income need has gone from $4,500 down to $4,000.
What to do? We’ve noticed many who were taking $2,200 from the IRAs continue to do what they were doing before. The $2,200 per month distribution was $700 per month more than before, or $9,400 more annually. At the end of the year, Mary would owe a little more than $4,500 of tax she didn’t owe before. This wasn’t to increase her lifestyle; it was just to maintain it. If we deducted this as a monthly amount, she’d be short about $400 per month. If she wanted to make that up, she’d have to increase her withdrawals by another $5,500 per year. So, while as a married couple Mary and Bob were fine, as a surviving spouse, Mary must increase her distributions by about $14,000 per year. Not to mention, without any life insurance, their estate saw a negative cash flow of about $30k for burial and income for the 12 months +/- depending on funeral costs and depending on the month Bob passed. In this example, $20k-50k of permanent insurance would be beneficial to some and unnecessary for others depending on the other details regarding their personal situation.
How life insurance can increase spending capacity
I noted earlier that permanent life insurance can increase the spending capacity for retirees. I’ll give you a simple scenario. I met a woman whose husband had passed. He left her with $400,000. Together they had a goal of leaving $50,000 to each of their five children. To accomplish this goal without life insurance, she would need to purchase standalone LTCI insurance to protect against future healthcare costs, and could only base spending on the $150,000 of net assets. She would need to continue to work to make sure this would happen. The solution offered by life insurance is much more attractive: All she needed to do was purchase permanent life insurance. Make it a single pay and then make an irrevocable life insurance trust the owner. This eliminates the need for LTCI insurance, frees up more cash flow and leaves her with over $300,000 to spend as she sees fit, while still accomplishing their goal of leaving $50,000 to each child. The freed-up premiums would have increased her cash flow and therefore freed income to spend by nearly $400 per month, and now she had two times the amount of assets to draw an income from. Permanent insurance can increase one’s spending capacity if used in the correct form for the correct situation.
Dave Ramsey is an intelligent person. He understands the difference between compounded annualized growth rates and annual averages, but chooses to ignore the mathematical impact since the wonder of compounding interest will “inspire” people to invest. He asserts that we math nerds fight over a few percentage points which are irrelevant as long as he gets people to invest. He says there’s no need for permanent insurance, that it’s garbage and a rip-off. He uses the example of a 32-year-old buying a 20-year term policy who follows the Ramsey system to illustrate why permanent life insurance is not needed. Yet poor unknowing Dave proves his very own point wrong by sharing with us that, at 47 years old, with no personal or corporate debt, no mortgage, ample savings, and ample income, he still maintains coverage past the point where his plan says it’s needed.
I’m not making this up. I’m just stating the facts. The fact is term insurance exists for a reason. It’s good and appropriate for people given particular objectives, needs and desires. The fact is permanent insurance exists for a reason. It’s good and appropriate for people given particular objectives, needs and desires.