Our Response To Dave Ramsey

Why “Buy Term and Invest the Difference” Isn’t Always the Best Advice

As a financial professional with over two decades of experience, I’ve seen a fair share of financial advice come and go. One piece of advice that has stuck around, largely due to personalities like Dave Ramsey, is the mantra “Buy term and invest the difference.” While this advice sounds good on the surface, it’s not always the best path to financial security and wealth building. Let me explain why.

Recently, we received a video from one of our listeners, Jonathan. The video featured Dave Ramsey advising people to buy term insurance and invest the difference in mutual funds rather than purchasing whole life insurance. Jonathan shared that he had followed this advice when he was younger, getting rid of his whole life policy in favor of term insurance. Now, at 38, he regrets that decision.

Why the regret? Because the whole life policy he started when he was young would be growing nicely now. The cash value would be increasing faster than the premium he paid each year. Not only was that policy providing life insurance protection for his family, but it was also an asset – something the Supreme Court ruled on back in 1911.

This is a crucial point that many people miss: life insurance, particularly whole life insurance, is an asset, not just an expense. When we compare it to an investment, we’re comparing apples to oranges. Both have their place, but they serve different purposes in a comprehensive financial strategy.

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Now, let’s break down Ramsey’s argument. He suggests that a 30-year-old can get a $250,000 term life insurance policy for about $13 a month. He then proposes taking the difference between this and a whole life premium (about $167/mo) and investing it in a growth mutual fund. Ramsey assumes an 11% annual return in the stock market, projecting growth to over $144,000 over 20 years, and to $1.4 million by age 70 if contributions continue.

Sounds great, right? But there are several problems with this scenario:

Unrealistic Returns: Ramsey assumes a consistent 11% return year after year. In reality, the stock market is volatile. Some years you might get 20%, others you might lose 10%. The sequence of these returns matters tremendously.
Ignoring Fees and Taxes: The projection doesn’t account for investment fees or taxes, which can significantly eat into returns.
Inflation: The buying power of that $1.4 million in 40 years will be much less than it is today.
Lack of Insurance Coverage: The term policy expires after 20 years. If you still need coverage at 50 or 60, you’ll be paying much higher premiums, eating into your investment contributions.
Access to Funds: What if you need to access your money when the market is down? You could be forced to sell at a loss.

Let me share a real-life example that illustrates the potential pitfalls of the “buy term and invest the difference” strategy.

Belinda, a former Primerica life insurance agent, told us she and her husband had followed the “buy term and invest the difference” advice to the letter. They bought term insurance and invested in properties along the Gulf Coast, expecting to turn a nice profit for their retirement.

Then Hurricane Katrina hit in 2005, followed by the BP oil spill. When Belinda contacted us in 2011, she was in tears. They wanted to sell their properties and move closer to family for retirement, but they couldn’t. And they no longer had life insurance coverage. Belinda told us, “I wish I would have bought whole life insurance and built up my assets in the whole life insurance.”

This story hits close to home for me. When I was a young chiropractor, a patient named Nathan Steinbach advised me to buy whole life insurance. I dismissed his advice, telling him I was going to buy term and invest the difference. Now, I wish I could tell Nathan he was right. It wasn’t until I was 45 and read Nelson Nash’s book about the Infinite Banking Concept that I realized the mistake I’d made.

The truth is, we can make numbers look good either way. Ramsey makes investments look fantastic by assuming an 11% return every year, ignoring fees, taxes, and market volatility. We could make whole life insurance look equally impressive by comparing it to average investment returns. But that’s not the point.

The real issue is that it doesn’t have to be an either/or proposition. There’s no reason we should settle for only the benefits of investing or only the benefits of a good whole life insurance policy. Each has its place in a well-rounded financial strategy.

Whole life insurance isn’t just about the death benefit. It’s a multi-faceted financial tool that provides:

Protection: A guaranteed death benefit that lasts your entire life.
Savings: Cash value that grows tax-deferred and can be accessed during your lifetime.
Stability: Guaranteed growth that’s not subject to market fluctuations.
Flexibility: The ability to borrow against your cash value for any purpose.

When designed properly, a whole life policy can be a powerful asset in your financial arsenal. It can provide a foundation of security that allows you to invest more aggressively in other areas if you choose.

Now, I’m not saying whole life insurance is right for everyone in every situation. There are times when term insurance makes sense, particularly when you’re young and need a lot of coverage on a tight budget. But even then, a combination of term and whole life can often provide the best of both worlds.

For instance, I recently spoke with Angie, who could only afford $250,000 of term insurance for 20 years. By adjusting her budget slightly to $300 a month, we showed her how she could have $250,000 of whole life insurance fully paid up by the time her term policy expires. This gives her permanent coverage and an asset she can use in retirement.

The key is balance. We don’t advocate putting all your money into life insurance, just as we wouldn’t advise putting all your money into a single mutual fund. Life insurance should be the foundational basis of everything else you do financially.

Think of it like building a house. You start with a solid foundation (protection), then add the main structure (savings), before moving on to the extras (investments). Many people try to build their financial house upside down, starting with high-risk investments before they have a solid foundation of protection and savings.

With whole life insurance, you get protection and savings in one tool. You’re building equity that you can access and use throughout your life, all while maintaining a death benefit for your loved ones. You can use this equity to finance purchases, make investments, or supplement your retirement income.

This is something Dave Ramsey and other proponents of “buy term and invest the difference” often overlook. When you have both protection and savings, you can turn your debt into an asset. You can recapture the money and interest you would have paid to creditors. This is a powerful concept that can significantly accelerate your wealth-building efforts.

While Dave Ramsey offers some good advice about budgeting and getting out of debt, his stance on life insurance and investing doesn’t tell the whole story. It’s important to think critically about financial advice, even (or especially) when it comes from popular personalities.

Remember, there’s no one-size-fits-all solution in personal finance. Your financial strategy should be as unique as you are, taking into account your individual goals, risk tolerance, and life circumstances. Don’t be afraid to question conventional wisdom and explore all your options.

At McFie Insurance, we believe in educating our clients so they can make informed decisions about their financial future. We don’t just sell policies; we help people understand how to use financial tools effectively to build wealth and achieve their goals. Schedule a strategy session.

If you’re unsure about your life insurance needs or want to explore how whole life insurance could fit into your financial strategy, we’re here to help. Let’s have a conversation about your unique situation and goals. Together, we can create a plan that provides protection, builds wealth, and gives you peace of mind for the future.

If you haven’t seen this particular video you can watch it here: The Dave Ramsey video Jonathan sent us: https://www.facebook.com/story.php?st…

1:38 Is life insurance an asset?
2:28 Dave Ramsey’s life insurance example
10:00 Do you need life insurance after age 50
12:46 When Buy Term and Invest the Difference doesn’t work out
14:33 Should you invest or buy life insurance
16:39 Fisher Price donut ring demonstration
21:12 Is Dave Ramsey a life insurance agent?

If you have a question or content you would like us to comment on in the podcast, reach out to us in the comments. We look forward to hearing from you soon.

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