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LIFE

Fighting the ‘Alternative Truth’ About Life Insurance

I t’s time to correct Dave Ramsey and his society of Ramsonites with math and reason.

My goal is to help you, the advisor, fight the faulty mathematical premises Ramsey and his team spread more quickly than the flu in a pediatrician’s waiting room. I hope to help you dispel Ramsey’s commonly spouted truths with math, fun, wit and a dash of sarcasm.

The journey starts at DaveRamsey.com, in the blog section. There we find the gem, “The Truth About Life Insurance.”

Here is Part 1 of Dave Ramsey’s version of truth: Your insurance person will show you wonderful projections, but none of these policies performs as projected.

We must assume Ramsey and team intentionally used the word “none.” Why is the word none important? Any answer that leads anywhere other than the validation of the truth makes the “truth” false.

Cash value life insurance has been in existence in the United States since the 1760s. Has any single, solitary policy over the last 250 years performed as projected? Of course, some have. Any answer other than no means Ramsey’s truth is false.

Using the word “none” was a stupid mistake, but it illustrates Ramsey’s strong bias against this insurance product. No amount of math, oops, I mean, who knows what amount of math it would take to convince Ramsey that cash value life can be a good tool?

Here’s Ramsey truth No. 2: If a 30-year-old man has $100 per month to spend on life insurance and shops the top five cash value companies, he will find he can purchase an average of $125,000 in insurance for his family.

I used a life insurance calculator for a 30-year-old, preferred best nonsmoker with guaranteed coverage to age 100. The lowest rate I found was $49.98 per month. Even the worst rate was nowhere close to $100. We’ll use the $49.98, since Ramsey tells listeners to meet with a good life insurance agent to get the best — often meaning the lowest-cost — insurance.

For this example, I’m using a guaranteed universal life (GUL) policy. Although an indexed universal life policy without the guaranteed coverage would require less premium and therefore further dampen Ramsey’s flawed math, I instead wanted to use a GUL for one simple reason.  The policy projection is guaranteed to perform as projected, and this basic principle makes Ramsey’s earlier comment of “none” even more idiotic.

Consider the actual premium needed was only $49.98 per month rather than the $100 per month Ramsey indicated. The actual premium, for a product that is guaranteed to do what it claims, is still 50 percent less expensive than what Ramsey claimed. 

Now for the third Ramsey truth: If this same guy purchases 20-year-level term insurance with coverage of $125,000, the cost will be only $7 per month, not $100.

Earlier in this article, I used an underwriting class of preferred best nonsmoker for two reasons. One, according to the Centers for Disease Control and Prevention, is that fewer than 16 percent of American adults smoke. Two, a standard-health smoker would cause the monthly term insurance premiums to be five times higher than the amount Ramsey gave. With statistics and reason on my side, I went with preferred best nonsmoker.

To get the term quotes, I went to Ramsey’s go-to, Zander Insurance. The monthly premium for a 30-year-old nonsmoker with preferred best underwriting was $10.31 a month, not $7. No big deal? Sure it is. This is 50 percent higher than what Ramsey stated.

Any answer other than yes means it’s not true. Are premiums only $7 per month? Nope. Sorry. As a percentage, not even close.

Ramsey cash value life insurance truth No. 4: All of the $93 per month disappears in commissions and expenses for the first three years.

After that, the return will average 2.6 percent per year for whole life, 4.2 percent for universal life and 7.4 percent for the new-and-improved variable life policy that includes mutual funds, according to Consumer Federation of America and Kiplinger’s Personal Finance and Fortune magazines. The same mutual funds outside the policy average 12 percent.

You missed the ingenious Ramsey marketing at work, didn’t you? I did too the first time. He cites Kiplinger and Fortune for life insurance policies, but then right after the citation, he slides his own highly debated and many-times-debunked 12 percent rate of return for mutual funds.

Wade Pfau of The American College wrote an article called “A Warning to the Advisory Profession: DALBAR’s Math Is Wrong.” Here Pfau compares the DALBAR’s stated Standard & Poor’s 500 annualized return with reality. Meaningful to this piece was his computation of the time-weighted annualized return. Time weighted means money invested equally each month rather than all at the beginning.

Looking at each 20-year period ending from 2003 to 2016, there wasn’t a single

period yielding a return greater than 12 percent. In fact, nine of the 14 20-year periods had a gross rate (no fees deducted) of 8.03 percent or less. The median was 5.40 percent — but we’ll come back to this.

Ramsey false truth No. 5: Worse yet, with whole life and universal life, the savings you finally build up after being ripped off for years don’t go to your family upon your death. The only benefit paid to your family is the face value of the policy, the $125,000 in our example.

This is generally true with GUL. However, Richard Rosen wrote an article for Investopedia called “Life Insurance With an Increasing Death Benefit,” in which he states,  “If the policy is a UL with an increasing death benefit, upon the death of the insured, the beneficiary would receive $500,000 of insurance — plus any accumulated cash value.”

So does the big bad life insurance always keep your cash value? No. Again, any answer other than 100 percent yes is a no. One more Ramsey truth is, in fact, a Ramsey lie.

Ramsey truth No. 6: When you are 57 and the kids are grown and gone, the house is paid for and you have $700,000 in mutual funds, you’ll become self-insured. 

Say hello to my li’l friend. My little friend is a financial calculator. This is going to be fun. 

Here are our inputs. The lowest-price term policy was $10.31 per month, whereas the lowest-price GUL was $49.98 per month. The difference is $39.67, but after a 5.75 percent upfront sales commission, which Ramsey has long publicly supported, we can invest $37.38 per month.

Going back to Pfau’s piece, the highest S&P 500 annualized rate over any 20-year period ending since 2003 was 11.35 percent, whereas the lowest was 5.04 percent, and the median was 5.40 percent. The average was 7.46 percent.

Why did I exclude the average? First, median represents the exact middle; half of the results are better and half are worse. Second, averages can be very misleading. For example, the average person has one breast and one testicle. Clearly incorrect.

Here’s a mathematical example. First-year return of 50 percent and a second-year return of 50 percent give you an average of zero, yet in reality it’s 25 percent.

How much will the 30-year-old have in their investment account by age 50 if they buy term and invest the difference?  They will have somewhere between $15,645 and $33,384, when we compare the best, worst and median rates of returns.

Ramsey says at the end of the 20-year policy, our 30-year-old crash test dummy will no longer need life insurance. So from age 50 to 57, we can invest the entire GUL premium minus commissions, which comes to $47.10 per month. 

In the chart below, you can see how the additional years of compounding, combined with a higher monthly investment, changes the best, worst and median scenarios. The highest balance at age 57 came to $77,078, whereas the lowest was $26,912, and the median was $39,429.

In all but one scenario, the invested balance was less than half of the life insurance given up.

Ramsey says if the 30-year-old follows these steps, by age 57 their investments will be $700,000. To get to $700,000, it takes investing $214 per month at a 12 percent rate of return, plus $212,651, which is the amount accrued from BTID based on Ramsey’s faulty assumptions. I should mention Ramsey’s BTID figure of $212,651 is a whopping 275 percent higher than our best scenario.

Using our best, worst and median life insurance numbers and adding the accumulated value of $214 invested each month at the best, worst and median rates garners a balance between about $500,000 and $175,000. Ramsey often says that if he’s just half right, you’re still in good shape. Hmm … the median represents half. The BTID median balance plus median accumulated value of the $214 invested each month creates a balance of only less than $200,000. Would you call this self-insured? Would you call it OK?

Projections don’t always pan out. This is one area in which I agree with Ramsey. He should address this in his own planning. Oh, wait — he doesn’t do planning. He does what he calls “counseling,” since he’s not licensed to do planning.

Here is Ramsey truth No. 7: The truth is that you would be better off to get the $7 term policy and put the extra $93 in a cookie jar! At least after three years you would have $3,000, and when you died, your family would get your savings.

Remember Ramsey overstated the cash value life premiums by 50 percent and understated the term premiums by 50 percent. The difference between the two types of life insurance, as we noted earlier, is only $37.38 per month. If that $37.38 were put in a cookie jar, after three years, the cookie jar would have $1,345. After 20 years, it would have only $8,971. Even Ramsey’s false amount of $93 per month is only $22,320 after 20 years.

Near the beginning of Dave Ramsey’s article, he wrote, “Sadly, over 70 percent of the life insurance policies sold today are cash value policies.”

No, Dave, sadly, more than 70 percent of the advice you give today on cash value life insurance is wrong, misleading, deceiving and borderline fraudulent. I’m sure Ramsey would argue his opinion, but his argument isn’t grounded in fact or math. In fact, on April 11, Ramsey said on his show, “A man with experience is not at the mercy of a man with an opinion.”

Ramsey is not a licensed insurance agent, financial advisor, investment advisor, accountant or financial planner, and he doesn’t carry the experience those with these credentials have. Like most, Ramsey has an opinion. His is an opinion void of mathematical reason. Bad math leads to bad advice, and bad advice hurts people.

 

 

Michael Jay Markey Jr. is a co-founder and owner of Legacy Financial Network, Kentwood, Mich., and is the author of Fireproof Your Retirement. He may be contacted at michael.markey@innfeedback.com.


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