Published: Tuesday, July 22 2014 12:00 a.m. MDT
Yes, generally speaking, life insurance shouldn't be used to "leave an
estate". But, depending upon the size of the premium this woman is paying,
and will yet have to pay, her strategy may be smarter than Dave Ramsey's
advice. In all likelihood, her premium is probably quite high. If so, and
depending on her personal perceived prospects on how long she may yet live, yes,
following David's advice may be smarter. But, I can see where, unless it
happens within a year of the initial purchase of a life insurance policy
(because then, the insurance company would just return the premiums paid,
instead of honoring the policy, if the person dies), buying the life insurance
policy, if the person on whose life the policy rests, if they anticipate they
might die between maybe 12 months and 5-years or so, paying the life insurance
premium might be the smarter investment choice for someone wanting to leave an
@Diligent Dave: I couldn't have said it better! Once again, Dave Ramsey
looks at the issue from one (biased) view, only. His view: insurance is a
rip-off. His view: the woman will definitely live long enough to invest. Doe he
have a crystal ball to predict when she will die? As far as Ramsey's
"infallibility," he once told a woman on his radio show she didnt'
need to get a living trust to plan her estate, but a simple will. "The trust
will cost you $3000; the will, next to nothing!" Wrong, again, Dave! Many
lawyers charge far less for trusts. He also forgot to mention to her was that he
sells will forms on his web site and that the will needs to be probated to be
valid at your death. (In some states, like California, probate can cost
thousands of dollars in legal fees.) It would be great fun to debate Ramsey.
Finally, no, I don't sell life insurance; yes, I am an estate planning
Dave's assumption that she will have $250,000 saved up after 13 years of
investing at $600 per month assumes a compound annualized rate of return of
13.4%. That's a pretty aggressive assumption to be able to assume those
types of returns will be obtained consistently over a sustained 13-year period.
So - she's making a bet on (1) living past 84 and getting a very high
return over the course of that time and (2) dying before 84 or having a
lower-than expected return on the investment. Seems like there should be a
better alternative based on her numbers.That being said, I agree
with the general premise that whole-life policies are often over-priced and not
worth the cost and your funds can be better employed elsewhere (assuming that
she doesn't know something about her health that would suggest she might go
sooner rather than later).
Once again, Mr. Ramsey shows his advertising bias regarding proper Estate and
Tax Planning. While the exact product that the mother is taking might not be
the most appropriate vehicle, some type of life insurance is usually the safest
way to leave a legacy. In a previous article posted by Mr. Ramsey in the
Desnews, he gave a reader the advice to "not gamble". Well, that's
exactly what investing in mutual funds amounts to...gambling. Why would you
want your mother to put her money at risk in the stock market? Only Wall Street
would. Not very smart. However, it does make sense that Mr. Ramsey gives this
advice since his two biggest advertisers are mutual fund and Term Life
Life insurance should be used to close the gap between potential cash flow needs
of a dependent (the beneficiary of the policy), and the income they will have
available without the policy. Dave Ramsey is spot on in principle: Life
insurance is not an investment, but insurance. And generally speaking, it
should be used that way. I would never count on insurance as a good vehicle to
build wealth. The rich certainly don't engage in this silly kind of
thinking. Insurance is just a tool, used for a specific purpose. Don't
let insurance salespeople talk you into 1) buying more than you need, and 2)
buying it for the wrong reason.
Isn't life insurance benefit received TAX-FREE? Hard to find an investment
acct that will allow you to grow your money tax-free and take it out tax free.
How much of that $250k will her beneficiaries be able to keep AFTER taxes. Keep
the life insurance policy, dude. And no, I'm not a life insurance
Based on the mortality tables, Dave is absolutely wrong in this case. His
assumptions regarding the accrual of $250,000 unreasonable as they assume
appreciation of over 13% annually. Life insurance is one tool to be used in
sound financial planning but it is not the toolbox. Each situation is unique
depending on income, life expectancy, lifestyle, discipline, etc. In this
situation, Dave is incorrect.
I worked as an Insurance Adjuster. Insurance is always priced to make more off
of you than what you will gain from it. Very few people beat the insurance
company at that game. You might think it is a good deal but there are so many
loopholes that they will find a way to decline coverage or limit the amount
refunded. Young people are the worst type of people to ever get insurance. That
is where insurance makes the most amount of money.
Dave is a lecturer, author, and financial generalist whose lifestyle depends on
seminars, DVD purchases, and book sales. He claims to be CPA but it is known
that he formally worked for Primemerica, who owned the AL Williams organization
in the past. Dave needs and wants a lightning rod to engage his minions in a
turbocharged frenzy in order to distract them from the real issues. He often
shoots from the hip when it comes to financial products presumably because
he's not held to any licensing or regulatory standards. I am surprised he
didn't advise the 71 year old to cancel her policy and buy a 20 year term
from his organization, which is his usual canned response. He did say that she
should "invest" and would probably or likely accumulate the 250k within
a 13 year period, if she was healthy. Isn't that the point the point of
the life insurance? Who knows if she'll live that long, which is why she
has the life insurance in the first place. He's like a broken watch;
correct twice every day.
Some excellent comments here.Cancelling a policy at age 71 because a
radio financial pundit says so is the most absolute dumbest thing a person could
do. There are options to explore! What is not known is if this
policy has any cash value. Important fact to know before ever suggesting
cancelling a policy. Second is health of the insured. An excellent comment about
mortality tables was previously made.If this person is serious about
investing their money in something else I'd be the first to step up and say
"Hey, let me take over those insurance payments!" Any children or next
of kin should seriously consider buying out that policy if the insured is
wanting to put their money elsewhere.The lady could kick the bucket
the next day and man what a tax free windfall and excellent ROI that would be to
a relative. A life settlement could be an option as well in the absence of a
relative stepping up to the plate.Never cancel a policy without
exploring ALL of the options.Dave Ramsey is the last person on the
planet to trust for sound advice when it comes to estate and insurance planning.
I get a wash at 13 years, but I use different math. Investing at 8% and $600
monthly, she would have $160,000 in 13 years. Her $250,000 insurance policy will
cost her $90,000 over 13 years. Assuming $90,000 would otherwise sit in a bank
account, the insurance policy is only increasing the value of her estate by
$160,000.This sweet lady should be spending this money on herself.
She has no obligation to provide for future generations. Her heirs should be
united with that message. $600 per month could pay for light housekeeping, help
maintaining a garden, transportation to a restaurant for a weekly lunch with
friends, a catered meal with family or whatever she wants to improve her quality
of life. The best gift she can give is to provide for her own
retirement so that she does not become dependent on others. If she does not have
enough money for a modest estate, she cannot afford $7,000/year for this policy.
The appropriate question is: "How do we convince her to cancel this policy
so that she will be more stable in a few years?"
taxman"... I agree with the general premise that whole-life
policies are often over-priced and not worth the cost."Hmm, that
premise must be something you heard from Dave because that's what he
preaches, it wasn't mentioned in this article, universal life was.While there are many different companies out there selling whole life, these
policies are structured to be high on one end as opposed to the other, they do
average out. They also provide a guaranteed rate of return, death benefits are
tax free, and they have 'living' benefits as well such as being able
to borrow against or use as collateral. And some of these companies offer
dividends in addition to the interest. There is also the paid up
option where the policy is paid up at a contractually determined time. In this
day and age it is possible to out live the premium period and have a paid up
policy. It just depends.
RavonalI was not aware of Dave Ramsey's Primerica connection.
I'm not a groupie. I fact checked that and you are absolutely correct.It explains his anti-permanent insurance bias.Thank you.
I think a lot of the advice Dave Ramsey is good but it is still left up to every
person to do their due diligence ESPECIALLY when it comes to investing.
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