Term vs Whole Life Insurance: Why Financial Guru Dave Ramsey Favors Term

Term vs Whole Life Insurance: Why Financial Guru Dave Ramsey Favors Term


Dave Ramsey, March 23, 2006. (AP Photo/Mark Humphrey)

There has been an ongoing debate over which type of life insurance holds more value to the average person–term life insurance or whole life insurance. Financial guru Dave Ramsey is solidly behind term life policies. In fact, he hates whole life policies, and would not recommend under any condition.

Ramsey is a personal finance personality, radio show host, author, and businessman. He hosts the nationally syndicated radio program “The Ramsey Show.” He’s written several books, including The New York Times bestseller “The Total Money Makeover,” and hosted a television show on Fox Business from 2007 to 2010.

Whole life insurance offers permanent death benefit coverage for the life of the insured. Whole life insurance has a cash savings component, which the policy owner can draw or borrow from, according to Investopedia.

Term life insurance, also known as pure life insurance, is a type of death benefit that pays the heirs of the policyholder throughout a specified period of time.

Once the term expires, the policyholder can either renew it for another term, convert the policy to permanent coverage, or allow the term life insurance policy to lapse.

Under term life insurance, there is a guarantee of payment of a stated death benefit to the insured’s beneficiaries if the insured person dies during a specified term, Investopedia reported. These policies offer no value other than the guaranteed death benefit and do not feature a savings component.

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Term life is preferred by Ramsey.

According to Ramsey’s website, “Whole life insurance is a rip-off!”  Ramsey stated that whole life often costs hundreds of dollars more a month and includes a “savings” plan with a terrible return.

Ramsey also explained on his website the difference between term and whole life policies.

“We’ll give it to you straight—term life insurance works, while whole life fails,” the site stated.

With term life there is a set premium that remains the same throughout the life of the policy, and it only lasts for a defined number of years. Whole life, on the other hand, offers premiums that can vary, the site explained.

Term life insurance provides you life insurance coverage for a set amount of time–if you get a 20-year policy, you’re covered for 20 years. Now if you die during those 20 years, your beneficiaries get a life insurance payout. Ramsey’s website gives the example of a $300,000 policy for a 20-year term with a death in those 20 years, your beneficiaries would get $300,000.

For whole life policyholders, if you die before the maturity of the policy, your cash value disappears. “If you didn’t do anything with that cash value while you were alive—guess what? The insurance company keeps it! Your family gets the death benefit, and the insurance company nabs your cash value account. (This is one of the worst parts of cash value life insurance and why we will always tell you to steer clear of it.),” Ramsey wrote of the website.

During an episode of his “The Ramsey Show” entitled “Heated Debate Between Whole Life Agent and Dave Ramsey,” Ramsey takes a call from a listener who is a whole life insurance agent. A heated debate ensues between the two.

After the caller gives his reasons why whole life is a better option, Ramsey answered, “You could never convince me there’s a good time to use a credit card. They suck, they aren’t a good product. You can say the same about your whole life policy.” 

He continued, “It’s a horrible product. You pay 20 times more than the worth of the policy and when you die they 9the company) only pays the face value.”

On another episode of the show, this one entitled “Is Whole Life Insurance Ever A Good Idea?” he is asked if there is ever a case where whole life would be the preferred option. In short, Ramsey said “no.”

“It is the payday lender of the middle class. They have been screwing the middle class for decades. All the independent thinkers…based on numbers and mathematics, feel whole life is a rip off,” he pointed out.

The added, “The mathematics is pretty simple. (Whole life) is 20 times more expensive. You pay $100 a month and pay for whole life for the same amount of coverage you can get for $5 a month with term life. It’s the same amount of insurance.”

During an episode entitled “Why Is Term Insurance Better Than Whole Life Insurance?” spoke with a caller who had taken out while life policies for her three children. Ramsey explained to her why that was a bad idea and how she was “ripped off” by her agent.

“It’s one of the worst financial products on the market today,” he said definitively. “The car lease, the whole life insurance policy, the credit card are the three things keeping the middle class in the middle. People are just getting messed over. When you crunch the numbers, it just makes you go ballistic about how bad the consumer is getting treated….because they hold you back.”

He advised, “Look around and see what wealthy people are doing…Let’s do wealthy people stuff.”

Financial talk show host Dave Ramsey works in his broadcast studio in Brentwood, Tenn., March 23, 2006. (AP Photo/Mark Humphrey)