Dave Ramsey's Complete Guide To Money: The Handbook of Financial Peace University by Dave Ramsey

Author:Dave Ramsey
Language: eng
Format: mobi, epub
Publisher: Lampo Press
Published: 2014-06-20T00:00:00+00:00

Insurance Is a Lousy Investment

Some agents will try to win you over by talking about how cash value is really an investment. They may say something like, “Term is like renting, but cash value is like owning.” Here’s the truth: you never want to use an insurance plan as an investment. Insurance is for insurance. It costs you money because you’re transferring risk. Keep your investments separate and you’ll always come out ahead.

First of all, the returns on cash value insurance as an investment are historically low. The lifetime average of the stock market is around 12 percent, so you’d think that any investment, even inside a cash value plan, would be somewhere around that. Think again. The different types of cash value policies grow at different rates, but generally they come in between 2 and 7 percent. Some products, like variable life, may average better, but then the insurance company hits you with all sorts of fees, so your net yield hits somewhere around 7–8 percent.

But here’s the kicker for me. Let’s say Joe gets a $125,000 cash value policy at thirty years old. He’ll pay somewhere around $140 per month for that if he’s in good health and doesn’t smoke. Part of that $140 goes to pay for the insurance, and the rest goes into that “great” savings account someone sold him. After forty years of paying way too much for his insurance, Joe’s built up around $65,000 in cash value by age seventy. So, he has $125,000 in insurance and $65,000 in cash value. At that point, Joe dies. How much will the insurance company pay out to his wife? She’ll get $125,000. Can you guess what happens to the $65,000 he’s built up by overpaying for his insurance for forty years? The insurance company keeps it! Good-bye, Joe! Thanks for playing!

If Joe had gone with term instead, he could have gotten a $400,000 twenty-year policy (more than three times as much coverage) for about $11 a month. That’s about $130 less every month. If he were to invest that $130 into a good mutual fund at 12 percent starting at age thirty, it would grow to around $133,000 by age fifty when the term expires, and to more than $1.5 million by age seventy! And if Joe dies at that point, guess what? His wife still has that $1.5 million! That’s why it’s always better to keep your insurance and investments separate. You don’t want to faithfully invest your whole life and leave all that money to an insurance company, do you? I sure don’t.

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