Dave Ramsey Calls This 'One of the Worst Financial Products Alive Today'

I have been known to disagree with financial guru Dave Ramsey -- on more than one occasion. However, when Ramsey calls whole life insurance "One of the worst financial products alive today," I'm with him 100%. In fact, I'm the amen chorus, like those little old ladies I marveled at in my youth, the ones who sat in the front pews at church, enthusiastically seconding everything the preacher said.

What is whole life insurance?

To understand what whole life insurance is, it's helpful to understand term life insurance. As the name suggests, a term life policy lasts for a specific term. For example, if you purchase a 20-year term life policy and continue to pay the premiums, you'll have life insurance coverage for 20 years.

With a whole life policy, you're promised life insurance for the remainder of your life as long as you continue to pay the premiums.

How it's sold

When a person attempts to sell you whole life insurance, they're passionate about the product for good reason. If you buy, Insurance Business Magazine reports that it's common for an agent to receive more than 100% of the total premiums for the policy's first year. That payday provides an incentive for insurance agents to push a product that is, at best, financially questionable. Here are some of the selling points agents use:

• What they say: "You'll receive lifetime coverage." What they imply: "You surely want to leave money to your children and grandchildren."
• What they say: "Your policy will build cash value." What they forget to say: "This is a complex contract, and chances are it will take you years to figure out how little money goes into your cash account."
• What they say: "Your premiums will remain the same your entire life." What they fail to tell you: "You're paying up to 20 times more for a whole life policy than you would for a term life policy."
• What they say: "The death benefit is income-tax free, which will make your beneficiaries happy." What they don't say: "If you run into financial trouble in your old age and can't keep up with the expensive premiums, your policy will be canceled, and everything you've paid into it will be gone."

Being an effective salesperson requires a special gift, which in itself is a wonderful trait to have. However, due to the hefty chunk of cash the agent will put in their bank account if you sign on the dotted line, it's tempting for an agent to gloss over the ugly parts of a whole life policy.

Amen, brother Dave

I could list all the things about whole life that I find scammy, but Ramsey did a bang-up job listing those things on his show. Here's what he had to say about it.

Whole life policies have a horrible rate of return

The sales pitch promises that a portion of your money will be invested and, over the years, will swell, providing you with a nice nest egg. According to Ramsey, the average whole life policy has a 1.2% rate of return.

Compare that to 10%, the average amount the stock market has returned over the past 50 years. Even though there have been bear markets, bull market years have more than made up for it.

Whole life insurance is expensive (very expensive)

Ramsey tells his listeners that for the first three years, the cost of a whole life policy is 20 times higher than a term life policy. In other words, if you're paying $100 monthly for a whole life policy, a term life policy with the same death benefit would cost $5 per month.

After the three-year mark, you can expect to pay up to 17 times as much for whole life.

The promise of building a cash account is a joke

Due to the complex nature of whole life, it's easy to become confused about how much of your money is actually building cash value. Ramsey says that you can expect to build zero cash value in the first three years of owning the policy. Your premiums are divided, with part going toward the death benefit of your policy and the rest to the insurance company and agent who sold you the policy.

They expect you to pay them interest?

A huge selling point for agents is the fact that you can eventually borrow money for the cash that builds up in your account. What they do not always mention is that you'll have to pay interest on any money you borrow.

That's right, borrowing your own money means paying the insurance company interest as though it loaned you the money.

What happens if you miss a payment?

It's not at all unusual to run into periods of financial hardship, and if you have to choose between keeping the lights on in your home and paying your whole life policy, you're likely to opt for having electricity. Here's what happens if you miss a payment:

• If there's enough cash value built up, the insurance company may use money from that account to pay the premium.
• If there's not enough cash in that account to cover the premium, your policy will lapse.
• Once the policy has lapsed, the life insurance benefit ends.

The insurer gets another big payday when you die

Ramsey appears to become a bit hot under the collar as he describes what happens if you die with money remaining in your cash account (and I cannot fault him).

Let's say you're 65 years old and have faithfully paid your whole life premiums for 35 years. And for the sake of illustration, let's imagine that your account has built a cash value of $100,000. You've never withdrawn or borrowed any of the money, because you view it as an emergency fund that will move with you into old age.

However, you unexpectedly die. While your beneficiaries will receive the death benefit portion of your whole life policy, the insurance company keeps your entire cash account. $100,000 goes right into its coffers.

Life insurance is vital

Buying life insurance is one of the most important things you can do to protect your loved ones in the event of your death. It can also pay for your funeral and even be designated to care for any pets you leave behind. But here's the thing: It does not have to be expensive, and it does not need to be complex.

Dave Ramsey got it right here. Whole life policies are a truly bad idea.