7/14/2019 Dave Ramsey is Wrong about Internal Rate of Return on Whole Life Insurance – Money Mastery

Dave Ramsey is Wrong about Internal

Rate of Return on Whole Life Insurance
February 6, 2016 / in Insurance, Investing / by Peter Jeppson

Dave Ramsey  has said many times on his radio show that whole  life  insurance  is a
terrible investment.  He likes to harp on his calculation of the internal rate-of-return
(or IRR) on the premiums deposited and the resulting cash value growth, pointing out
that the most you can ever hope for over many years with the IRR is 2.6 percent
annually.

But let’s consider how whole life works.  The insurance company calculates mortality
rates (death rates), their overhead expenses and then investment returns. The
problem with Ramsey’s claim is that he is comparing apples to oranges, comparing a
whole life policy to a mutual fund. Mutual funds don’t pay $500,000 if you die, for
heaven’s sake but whole life does! And whole life pays at age 88, or at age 92, or age
105.   Whole Life is always there to pay your bene ciaries a tax-free death
bene t as long as you pay the premiums.

For the sake of argument, let’s use Ramsey’s way of thinking in pushing mutual funds

as a good investment and see where they fall short in some ways compared to whole
life.  Mutual funds have fees, sales charges, on-going trading costs and market risks.  If

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the market goes down at a time in your life you plan to retire, oops!! You just had an
unpredictable event.   Whole life returns are  not based on  the market so  you can
predict how much money you will have and how long it will last at any age in
your life.  

Let’s say you place  $5,000 into a mutual fund… how much money would your
bene ciaries get back when you die? Net of cost, probably close to $4,885.  Now place
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$5,000 into a whole life  policy…how much do you get?   Answer is $500,000 tax-fee!!
 Now let’s go down the road 10 years while depositing $5,000 each year into a mutual
fund and the same into whole life.  The mutual fund is totally unpredictable.  You may
very well LOSE  25 percent of this money.   However, the whole life policy  has a 150-
year history of always being there at 2.6 percent   (if you use Ramey’s calculations).
This means you will have cash values of $56,274 you can use or in the case of death,
$500,000 for your loved ones, tax-free. Upon death at the end of 10 years, this is a
47.4 percent tax-free IRR.   If you continue these calculations out for 20 and then 30
and further to 40 years, the lowest IRR your family will receive is a 12 percent tax-free
death bene t.

How would your mutual fund have done?  Don’t know, plus the gains are taxable. All
the gains in a properly structured  whole life policy, while living, are tax-free.   So the
2.6 percent IRR is an e ective IRR of 3.4 percent in a 25 percent tax bracket.  In today’s
unsettled economy, a 3.4 percent IRR predictable rate is still very attractive, especially
when you just might die.   All through the years, you have access to the cash values
inside the whole life policy to use as you wish, even to nance your own loans so you
don’t pay  principal and  interest to a nancial institution.  By saving all that principal
and interest on your debts, the IRR could be equal to 48 percent, not 2.6 percent.

Why does Dave Ramsey insist on comparing apples to oranges?  The answer could be
that he has an interest in a term life insurance company.  It could also be that he has
never seen a properly structured whole life  policy? Properly structured, a whole
life policy will be worth a fortune to you.  I suggest you think out of the box and see

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how such a  policy can help create additional wealth for you and your family.   One
thing I am quite sure of, is that you will die and when you do, owning a whole life
policy will far outshine a measly mutual fund.

Tags: investing, return on investment, whole life insurance

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