As a proponent of using customized Whole Life insurance policies as the ideal cash management vehicle (see my previous post explaining how it works), I frequently encounter video clips from Dave Ramsey’s show where he confidently explains why guys like me are stupid or scammers (or both). As it turns out, Ramsey’s swashbuckling swipes at Whole Life typically are either half-truths or completely bogus. This was certainly true for the most recent example, in a September 19, 2023 clip where Dave argues with “Jim from Nashville”:
I will use the present post to unpack the good, bad, and ugly in the above exchange.
On the first point of contention — whether it’s true that the insurance companies “keep the cash value” and only pay the death benefit upon the death of the insured — Dave was right. In answer to the simple question, “When the insured dies, what does the named beneficiary receive?” we must clearly state that it is only the death benefit. I stress this because back when I first got into this literature, I misunderstood how to read the illustrations on Whole Life policies, and I thought you got both.
Now, having said that there’s nothing nefarious about the procedure. After all, the full name of the term is Cash Surrender Value, in contrast to the Death Benefit. If you surrender the policy while still alive, you get the Cash Surrender Value. But when death occurs, the beneficiary gets the Death Benefit. This is perfectly straightforward. The CSV is the spot payment for walking away early from the policy and is necessarily lower than the death benefit. It is the “shadow” of the death benefit (which will occur at an unknown distance in the future), discounted because of the time-value of money but also the intervening premium payments that would have to be made to keep the policy in force (if applicable).
So, although people (like me, years ago) who first get into Whole Life might misunderstand, once you grasp the basics of what the cash value is, there should be no question about whether the policy pays “just” the death benefit or the cash value on top of that. The very dispute is nonsensical. It would be akin to a man paying off the 30-year mortgage on his house, getting the title to the home free and clear, and then asking the teller at the bank, “Thank you for the deed. Now may I have a check for my $450,000 equity in the house, which my CPA informs me is entirely mine since I’ve knocked out the lien?” It would be clear in this scenario that our hypothetical man entirely misconstrued what “equity in the house” meant.
Besides clarifying the basic terminology and what happens upon death, the fact that the insurance company “keeps the cash value” comes into play when doing a head-to-head comparison of a Whole Life strategy versus “buy term and invest the difference.” For example, if brother Will is putting $1,000 a month into a Whole Life plan with a particular death benefit, while brother Tom is putting $250 a month into a term policy with the same death benefit and the remaining $750 per month into a mutual fund, then it matters that upon death, Will’s estate “only” gets the death benefit while Tom’s estate gets the death benefit plus the value of the mutual fund.
Even at face value, for consistency in this scenario we must point out that it also definitely matters that if Tom outlives the length of his term policy, he may choose to drop his coverage afterwards and when he dies his estate only gets the mutual fund — why, that dastardly life insurance company has “kept his death benefit”!
To push this issue another layer deep, one of the subsequent points the caller (“Jim from Nashville”) may have been trying to express, is that if you elect to have your dividends buy paid-up additional life insurance, then the face death benefit on the policy increases over time. So in our hypothetical scenario of two brothers, even if Tom takes out a term policy with the same face death benefit as what his brother Will took out in Whole Life, over time the death benefit paid to Will’s estate will be higher and higher compared to what would be paid to Tom’s estate. So this subtlety partially offsets the effect that Dave Ramsey has highlighted, even though he was belligerent on the point with the caller.
In order to “prove” to the caller that he was a fool who had given his son a horrible asset, Ramsey argued that if only he had put the money into a mutual fund, it would have grown at 11 percent annually. Why, by the time the kid was in his 80s, he’d have many more millions than the paltry Whole Life policy with its mere $2 million and change in cash value.
There are several problems with this argument. First, it ignores the risk of investing in the stock market. Ramsey could just as well “prove” that nobody should ever buy highly rated bonds, or especially not Treasuries, because they don’t deliver nearly the same yield as equities. Yet if he said it so nakedly in regards to standard fixed-income assets, even Ramsey’s die-hard fans might realize he was leaving out something important. For just one example: There were plenty of people who had to postpone their retirement after the 2008 crash, whereas those who had their wealth in Whole Life policies didn’t see their value drop a cent.
Another major omission is that Ramsey is overlooking the fact that the Whole Life policy is life insurance. The caller’s son hopefully lives to his 80s, and values his policy at that time because of its cash value, but if he happens to die, say, when he’s 20, then he would get a death benefit of at least $800,000. (I asked one of my colleagues at infineo to whip up a child Whole Life policy with the same premium payments that the caller described.) Not even Dave Ramsey could make assumptions about stock market performance to get a mutual fund with the same level of upfront funding to be worth anywhere near that when the child is age 20.
This is a major reason that the “internal rate of return” on the Cash Surrender Value is modest on a Whole Life policy, compared to the IRRs on other typical assets. Part of what your premium payments are buying is the in-force death benefit coverage for the entire duration of the policy.
The most bizarre aspect of the call occurred at the end, when Jim from Nashville wondered why so many banks employ this financial strategy, if it’s as stupid as Dave suggests. In response, Dave confidently told the caller that not only do banks not own Whole Life, but they wouldn’t be allowed to by their regulators, such is its unsuitability for any serious purchaser.
Well, nope, there is an entire asset class called Bank-Owned Life Insurance or BOLI. As of June 2023, US banks held permanent life insurance policies with some $185 billion in Cash Surrender Value on their books. It’s true that the typical BOLI policy is a fixed UL product, but some banks do own Whole Life. (And if regulators allow banks to hold UL, they most certainly allow the even more conservative Whole Life.)
I went to the YouTube comments for the clip posted above, and was initially shocked to see that out of hundreds of high-fives given to Dave by his loyal fans, apparently only one or two of them seemed aware of the existence of the asset class known as BOLI. But then the mystery was solved when I typed in informative comments accordingly, only to have them zapped in under a minute. Apparently one of Dave’s employees was giving a perpetual “makeover” to the comments on this post, protecting his innocent fans from learning about the $185 billion that US banks hold in a financial vehicle that Dave confidently says is only for suckers.
NOTE: This article was released 24 hours earlier on the IBC Infinite Banking Users Group on Facebook.
Dr. Robert P. Murphy is the Chief Economist at infineo, bridging together Whole Life insurance policies and digital blockchain-based issuance.