My senior year at Eastern Michigan University, I met with a counselor to make sure everything was in order for me to graduate. Apparently, it was not. I had never taken Math 118: Linear Equations.
"Isn't there a way to test out?" I asked. Given that I had taken tougher mathematical courses in high school, I figured surely something could be done. Unfortunately, I was out of luck and had to take the course.
First test, 25 out of 25 — BOOM! But wait: That only equated to a grade of 50 percent. Shocked, I asked the teacher to explain. Turns out, it was simple. Half the credit was given for showing your work. "The answer is only half the problem," my teacher said. "Sometimes the answer is correct, even when the steps to get there are invalid." In other words, to prove your answers, you must be transparent about the theory behind them.
These words have stuck with me, all these years later. And I remembered them on August 12th, midway through the second hour of the Dave Ramsey Show. On this night, Dave did it again. He showed the world that his unique brand of Southern stubbornness simply will not die. He continued to attack whole life insurance, regardless of context or circumstance.
"Fortunately, I was provided a whole life policy at a young age," Brett from Arlington, Texas says on the Ramsey Show. Now that he's in his mid-thirties with a family, Brett feels he needs more coverage. He wants Dave's advice on a term policy with a return of premium rider (ROP). Here I sit, car parked, right in front of my house. I had pulled into my driveway just as this segment got underway. I couldn't get out. All I could think about was that Brett had said "whole life" and "fortunate" in the same sentence. "Dave's not going to be happy," I thought. "Oh, this will be fun."
Of course, Dave quickly dismisses the ROP and tells Brett to buy a term policy without the feature. He gives a thorough and valid explanation as to why he believes this. Then — as if he were directly challenging me, like a news network moderator to an outspoken presidential nominee — he slams whole life policies and the entire insurance industry. He references Gerber Life, saying, "If you buy your life insurance from the same place you buy your baby food, you have a problem." This is after he says that life insurance is the most gimmick-riddled industry of all.
"It's not fortunate, it's unfortunate," Dave tells Brett about the whole life policy purchased for him when he was a child. "It's a really bad product. The returns on investment are horrendous."
But, what if this whole life policy is not an investment? What if we used it for its intended purpose … uh, what was that again? Oh, right: life insurance with premiums that will never increase and, just as important, a death benefit that will never decrease. What if — and this is a big one, stay with me —what if the premiums under the existing policy are lower than they would be under a new policy? What if premiums for a dreaded, horrible, waste-of-paper whole life policy were equivalent or actually lower than the suggested term policy? (Take this out of context and I'll probably be losing some carrier appointments.)
I was going to grab my financial calculator to extrapolate the math. But then I thought, "Wait a minute, Mike, if your opponent doesn't use a calculator, isn't it an unfair advantage for you to do so?" So, for today, no calculator. I promise … sigh.
Alright, let's do this.
I went to Mutual of Omaha and found a $50,000 whole life policy for $16.00 per month. Since interest rates were considerably greater 30–35 years ago, the monthly premium Brett pays is likely to be lower, despite the more favorable mortality tables used today. If I had my trusty calculator, we could make a reasonable adjustment for this, but I promised to shelve the calc. for today. If only there was another way to find out how much Brett was paying for the policy. How could we do such a thing? I suppose our host could've asked this question, but who has time for questioning a suspect we've already concluded is guilty? Best we can do, then, is go with the $16 per month premium we could purchase today.
Next, how much would a $50,000 twenty-year term policy cost for a 35-year-old male? Go to Zander.com and click on "instant term quote."
Question 1: Date of Birth? Easy enough; let's go with 1-1-1980.
Question 2: Gender? Another easy answer; male.
Question 3: Have you used any tobacco products in the last 12 months? I have no idea. Let me go listen to the radio archives found at daveramsey.com … nope, the question wasn't asked. How can a financial professional advise against a product whose cost is undisclosed in favor of a product whose cost will vary greatly depending on tobacco usage? I'm sure this was just an oversight.
Question 4: Your health class? Another question we can't answer. See, this is what happens when someone who is not licensed to counsel folks on proper financial decisions does just that. Mistakes are made. It's a mistake to advise the replacement of a life insurance policy without asking simple qualifying questions. Ask any insurance agent how to determine the suitability of a life insurance replacement, and I guarantee they'll do a better job than Dave does here.
Using the Zander term quote, I got $7.83–$21.18 per month for a non-smoker. If Brett does smoke, the premiums vary from $19.69–$44.94. Looking at these numbers, it seems very likely that this is another example of Dave giving harmful, financially impactful advice. Dave has now convinced poor Brett to pay more for life insurance in any of the following circumstances:
A. Brett doesn't qualify for health class underwriting, which qualifies for the lower premiums.
B. Brett has used tobacco products in the last 12 months.
C. The actual premiums for the existing policy are lower than we assumed and are thus lower than the proposed replacement.
D. The cost of insurance (premiums minus the cash value component) are less than the proposed cost of insurance adjusted for the interest gained on the "invested difference."
