PODCAST EPISODE 293 – Dave Ramsey Doesn’t Understand Life Insurance (Part 1)

——————————————————————————————————————————-

0:12

Hello everyone and welcome to the sound financial group podcast. My name is Paul Adams. I’m the founder and CEO of Sound Financial Group and I am not joined by Corey Shepard today, accord is out doing wonderful, amazing things with his family and unable to join us today. But you have me. And today you also have my unwilling co-host, Dave Ramsey. That’s right. I decided to do another little Dave Ramsey clip because of one of his videos that came across my radar. Now, the video itself, we’re not going to get into all of the things that Dave speaks to in this video. But what I want to point out is the level of confidence, and condescension that comes along with an influencer, in this case, a financial entertainer like Dave Ramsey. The reason I say not financial advisor, totally unlicensed, and does not have the ability to offer financial advice. It’s the reason why the beginning and the end of each of his shows, say you should consult an advisor. And as Corey and I always say on this show, you should consult an advisor or coach. Now for some of you that advisor coaches us. If one of you is listening, and we are not your advisor, coach, you’re more than welcome to reach out to us. But the big deal is you shouldn’t take anything from a podcast or from a clip and say, This is what I should run with. You want to then test those things with somebody else. That’s the importance of an advisor or coach in your life and in your finances. Now, I don’t want to forget this is super important guys. I’m going to spend time on it now going forward because I do not want to forget, it is really, really important to us as a channel to subscribe. Most of you watching this right now are not subscribed. It means the world if you find any reason to comment, I’ll give you a few things to comment about. Comment below. Be sure to like the video, or be sure to dislike the video. If you don’t like it, I’ll take anything. But be sure to subscribe, share it with somebody else like the video. And let’s get in to listen to this person make a phone call into Dave Ramsey. And we’re gonna see how it goes from slightly passive aggressive to a full blown condescension and no willingness to explain to somebody what it is they’re saying. I think because of the zealotry we talked about before where somebody has made a decision 15 years ago is no longer revisiting that decision. They’re just recounting the decision they already made long ago, often evidenced by the unwillingness to provide any support for the point that they’re making. So let’s jump right in.

2:57

Welcome to the Ramsey show. How can we help?

3:00

Hey, Dave, glad to talk to you. You enjoy your show. Thank you, right. I am calling in response to a video I saw recently that you claimed Infinite Banking concept was a scam, and actually got quite pissed off about it. So I do not agree with that. And certain points that you made in that video. And I have set up a policy for my son. When he was one years old. He’s five now I’m sure.

3:33

Right there, that’s where Dave says, I’m sorry. I’m sorry, you did something generous for your son to try to set him up for financial future, etc. And that dismissive, passive aggressive thing, which you’ll see in a moment, that guy thinks he’s referring to his son being five years old, not this policy, but it’s neither here nor there. The passive aggressiveness will pass shortly, it’s gonna go to full blown condescending aggressiveness. Say that again?

4:00

I said, I’m sorry.

4:05

Yeah, so am I sometimes no. So So I set that policy up for was one years old, has a $500,000 face value, we pay 5003 $73 a year for 13 years.

4:24

Now, that’s gonna be important. $5,373 for 13 years, we’re gonna come back to that in a moment.

4:31

And it’s paid up at that point. There’s a few points that I wanted to discuss that I just didn’t agree with. Do you want to just kind of take one thing at a time? That’s fine. Okay. One of the main things was that so you claim that the cash value dies with you, and you only get to face value of paid out. That is, well, it’s not true. Whew, if you reinvest the dividends back into the policy,

5:03

dividend reinvestment is not cash value.

5:07

Okay, so it just said dividend reinvestment is not cash value. No, that’s not the main point that we’re going to pick on in our conversation today. But this is my point that I want to make. dividend reinvestment is not cash value. That’s the equivalent of saying the cash that you give to the teller is not a bank deposit. Because later it becomes a bank deposit after she puts it in the drawer and types it in the computer. Like that’s how silly that statement is. Now, Dave often sets up these straw man arguments, both he straw man’s makes it as easy as possible to approve of his strategies. And then he takes the most negative aspects of any other strategy out there that he doesn’t like. And he uses only the weakest parts of that, or totally untrue statements. Like, if you want a whole life policy from a mutual company, and it pays you a dividend, you are getting additional cash value, it is that simple. Now the reason he’s going to talk about a moment, it does go to purchase, paid up additions. Now what he doesn’t go on to explain is a paid up addition on a whole life policy, when you get a dividend, then it goes back into your cash value and death benefit, your death benefit grows a little, because it would be the equivalent of Imagine walking through a Walmart and there’s just like a little kiosk, and it says life insurance and you walked up and said, Hey, here’s my age, here’s my health. Here’s $50. What does that get me. And they look up on this mortality table and they say, Oh, that’ll buy you an $85 death benefit you never have to pay for again, you say great, leave your $50 behind and you take the insurance policy with you. That’s happening every year with the purchase of the dividends growing the cash value and the death benefit. Why? Because section 7702 of the IRS Code says that’s how you keep cash values tax free. So it’s not being done the way Dave talks about it almost like they’re buying a new insurance policy every year, which is in sane to even like propose. But he’s doing it so that people either he doesn’t fully understand it, or he’s intentionally trying to confuse his audience so that they don’t understand something like this well enough to use it prudently. Let’s jump right back in.

7:33

dividend reinvestment is because you have a mutual company, and the policyholders are the owners of the company. And so the profits from the company come to the policyholder, and they use that to buy paid up additions, that is not the same as keeping your cash value that’s buying extra insurance with your overpayment.

7:53

In correct, it is not the same as buying more insurance with your overpayment. They design the policies to be more robust. So here’s how I’d have you think about it had a mentor of mine teach this a long time ago. If you imagine the George Washington Bridge in New York, I don’t know exactly. But it’s something like it takes four lanes, each direction two levels. So basically, you have 16 lanes of traffic, and it’s designed to be able to have it full of totally packed 18 wheelers, both directions during a category five hurricane, so that that bridge doesn’t fall with bad weather or heavy loads. It is intentionally over constructed. When we acquire a whole life policy. It’s also intentionally over constructed. But there’s a difference. If you were to drive over that bridge at 3am One day when it’s just you and I don’t know 20 Other cars, you don’t benefit from the over engineering, but on a whole life policy you do benefit from the over engineering because that leaves profits for mutual company mutual company does not have stockholders. In fact, the board of a mutual company has tasked with the fiduciary interest of the policyholders. And as a result, the policyholders get dividends. stock companies also pay dividends, but you don’t see Dave Ramsey running around saying well, they had you overpay for your insurance, and then they sent those damn dividends out to the stockholders. One, that would be a dumb thing to say. Dave, it’s equally not as smart to say that it’s a bad thing that mutual companies pay back to their policyholders. There is no greater relationship and the only problem is there are not enough mutual companies left. Because enough CEOs were very very greedy and decided to take these long standing mutual companies convert them to publicly traded companies, and at the same time pocket a truckload of money. But he doesn’t beat up on that. It’s like Tara Old mutual companies even utilize whole life insurance. Here we go.

10:08

But it still works out to be know that having a cash value much greater than the $69,849, we put into the

10:19

actual cash value, not the paid up additions.

10:23

Alright, so he wants to somehow separate the actual cash value from the cash value that was accumulated with paid-up additions. It all shows up in the cash value column. There’s not like there is a value of dividend additions. But even if that is dividend additions, that would be like me saying about the mutual fund he notes is Well Dave, if I took my interest out every year, I never get that big compounding. Again, that would be a ridiculous thing to say. So for him to say, Well, yeah, it grows as long as you keep rolling the dividends back in. Now, I’m being a jerk to Dave, why he’s in the arena. This guy calling him does not deserve to be treated like a jerk. Dave is out there. Having built a tremendous career, you know, he’s worth, you know, probably between 50 and $100 million, which I don’t look at his pockets, I don’t care how much money he’s worth. But in a world where I don’t know, there’s some conversation about maybe the wealthy need to be a little bit more sensitive. Dave is kind of blown that thing as he just absolutely has zero empathy for this guy. Now, here’s my theory. If somebody called our show, and was misinformed about something, I’m not going at them. I’m coming alongside them. For those of you that have worked with our firm, you’ll know that’s what we do. Also, Dave has to do this, because it helps his ratings. So rather than come alongside people and maybe have 15% less views on his videos, he prefers to act this way. And I’m just going to call it out. Because what he’s doing rather than educating or coaching somebody is he spending the entire time not only making them wrong, but going out of the way to have the way he treats this person somehow make him look better or smarter. And his folks, co hosts that share the show with him. Don’t ever really get a chance to push back on that Sam, maybe you shouldn’t do it that way. So let’s get back in and see where this devolves do.

12:44

The actual cash value dies with you

12:47

no, because, okay, but,

12:51

but Okay, now, this is another one I need to speak to see, there’s so many fallacies coming at us so quick and express with the greatest amount of authority and confidence, and wrong. So when he says the cash value dies with you eat that’s cute. But it’s just not part of the contract. If let’s say I bought a life insurance policy that started with a base face amount of half a million dollars, that’s whole life. And then I own it a really long time. And some time later, I have $1.2 million of cash value, and $2.4 million worth of death benefit. If I die, my family gets 2.4 million. Now you could say oh, your cash value dies with you. Well, that’s true. That’s the straw man. It sounds cute sounds pithy sounds like they’re ripping you off. When in reality what they did is they gave you access, my cash value is almost like my access to the death benefit before I die. It’s much more accurate say it’s the part of the death benefit I can access and pull out and put back in while I’m alive the cash value than it is to say the cash value dies with me. So if the cash value dies with me, actually, here’s a great one. Here’s just a dead flat. Dave, you are wrong as all get out. Because the cash value died with me on that policy, my family would only get 1.2 No, there is the cash value and then the net amount of risk and a cash value grows over time and so does the death benefit. So, when Dave says these things, he’s being pithy and cute, wildly inaccurate. I had no idea how How often I was going to have to stop this video, the thing I want, it’s like seven minutes in, I was really going to miss disproof, I don’t think we’re even going to have time to get to it today. Because I can’t get I’m only two minutes and 23 seconds into this. And I’ve already had dispelled three or four things that we could objectively look up on Investopedia and show that Dave is wrong. But we’ll get to it, we get to a may have a continuation next week with Corey who may pull me back. And I may not be as agitated as I appear to be today. But let’s keep going.

15:33

But, but your your desk minus a is larger than your cash value. So it so whoever you’re so for me, I looked at it because you bought

15:43

insurance.

15:46

No, he didn’t buy more insurance, the dividends paid out. And in order to keep them tax free. According to section 7702 of the IRS Code, he had to deploy them back into paid up additions, which did increase his death benefit, but also kept that cash value growing with no taxation on it every year. Okay, Dave, please continue.

16:09

You don’t want to pay the addition as a paid up addition is buying additional insurance. And that’s why I’m getting more at death. Not because you got your cash value, but because you used your policy dividends to buy additional insurance. Right. But

16:24

that’s like saying the reason your mutual funds so much bigger is you compound your returns, and if you didn’t compound your returns, that wouldn’t happen. True. Also Dave, if I bought a bunch of real estate, and then the following year, just sold it real fast at 50%, less than what I paid for it. I would lose money also. Like, of course, you can do things that don’t work. But he’s not suggesting that what people do is buy whole life insurance and then just take their dividends not even close. He’s literally just saying your money is not in cash value, and it’s not growing, because it’s dividends. Okay,

17:05

that’s different than getting your cash value. If you if you took those policy dividends and went and bought a term insurance policy for 100,000. Well, you’d get 100,000.

17:13

Okay, this is a whole new level of like, I mean, that would be I’m not even going to try to make a comparison here. What he just said is, if you took your dividend from your whole life policy, and then you bought a term policy, you’d have more insurance? Yeah. Well, you would, but it’d be temporary insurance, it would expire. And oh, by the way, your dividend will get chewed up over time, if you don’t die within the term, which according to Penn State, less than half a percent of all term insurance policies result in a claim credibly profitable for the insurance company? And yes, you’d have more. But why would you own a whole life and buy a term insurance policy with the dividend from the whole life? Man, I wish I could, like somehow insert and see if Dave could actually answer these questions. I don’t think he could. He’s used to being able to talk over people. I’ve never seen him debate anybody of any worth. If there’s somebody who’s an enormous Dave Ramsey fan and wants to debate then please reach out to us info at SFG wa.com. Same place, you’d reach out, if you wanted to meet with one of our advisors, and just hear about our philosophy and see if we’re a good fit for you. Again, it’s info at SFG wa.com or go to our website and get one of our tremendous white papers, both Korea and I have written one, you can do that at SF g way.com. That sound financial group s f g way.com. All right, let’s go back to Dave.

18:50

But that’s not your cash value.

18:52

Well, I have a term policy.

18:55

But you missed my point. Okay, let’s you’re talking about you use the policy dividends you use the money they send to you, because you’re in a mutual company to buy additional insurance. Yes, paid positions. Yeah. If you buy a term policy on the side for $100,000. Instead, with that same money, you would get $100,000 more than your face value. But that’s not your cash value. That’s additional insurance. They’re different.

19:22

But in right, they are different and term, you can’t, you don’t have cash value to borrow again, I’m

19:29

aware of that. But your point was that you don’t lose the cash value and my point is all 100% of the time. By definition, you lose the cash value

19:38

100% of the time, by definition at your death, your cash value blossoms into a much bigger, totally tax free amount to make sure that your family has the greatest likelihood of having a good life going beyond you as the breadwinner, passing on. Giving your children a fighting chance of having a decent college, giving your spouse is a chance to be able to raise the kids and not immediately have to get remarried because of financial stress and circumstances. Like it, it is equally accurate to say your cash value turns into double, when you die, as it is to say you lose your cash value in your diet. That is the straw man, this is the kind of misinformation out in the marketplace. I’ve heard people restate it. And then I say help me understand this. And then the they realize they just took something Dave said, and and they don’t actually know it. And I would counter Dave has some narrative about why it’s okay that he’s talking the way he is to people. And with these levels of inaccuracies, but you get the point. He likes having these debates with somebody who’s not well equipped, I almost promise you if I had called into his show and had this conversation with him, it wouldn’t have aired. And it wouldn’t have aired, because there will be somebody on the other side of the equation being able to go yes, that’s a straw man argument, Dave That’s just inaccurate. That this is the function of how cash value and death benefit work. Remember, unlicensed financial entertainer? If you were an insurance agent? I think in most states, you would lose your license if you tried to talk about life insurance the way DAVIS

21:18

You okay, but Okay, so, as I said tit for tat if he lives to be 80. I’m looking at the the readout here, if you say you only listen to the ad, okay, all right cash value, it’ll be worth about $2 million. But the payout for the death benefit will be 2.6 million. So okay, technically.

21:42

So what the caller just expressed is this policy, that when the child got it at one had a half a million-dollar death benefit, is projected to grow up to 2.7 million by the time he’s 80 years old, or 2.6, whatever he just said, Okay, that’s what the this fellow just expressed about this policy, and it would have some large cash value, also at that age ad. Now, if you’re not aware, whole life insurance functions more like a CD or US Treasury, then it does equity investments. So cash value in whole life insurance only goes up each year can’t go down, and can go up a little faster or slower, depending on how good the dividends are from the company that issued it, which often is tied to long term interest rates. So like right now, insurance companies are doing the best to buy these higher yield bonds, because those will pay dividends to their policyholders for years to come as they lock into these higher interest, Treasury notes, etc. And then be able to turn that into good use of their reserves used to pay claims. And the excess interest on those reserves get paid out to the policyholders via dividends. Well, you’re taking,

23:05

like you’re taking your bent your policy dividends, and go buy term insurance with it and you would have more than you’re talking about, because you

23:14

Okay, now that right there is just dead, dead wrong. You are not going to have term insurance on an 80 year old. But with dividends from a whole life policy, like this whole idea of your dividends by Term insurance is like it doesn’t even make sense. It like if this was a group of financial people all around talking. And Dave Ramsey said that it would be like one of those record scratches in the room.

23:42

Get better buy on the insurance than you’re getting with this rip off whole life crap.

23:46

Yes, you would get a hot but you wouldn’t feel.

23:50

Now, here’s how I experienced a rip off. He says this whole life rip off crap. Now when someone rips me off what they’re doing is taking money from me and giving me nothing back. Or a rip off could be You took money from me and gave me part of it back. But the caller just said it’s going to grow to millions of dollars for their child at age 80. Or, and of course, it’s growing much more than or alongside that all the ways you project it on a curve. That’s not a rip off. That is his way to try to demonize something so that he doesn’t have to disagree with if he just calls it a rip off. Then nobody really asks for his math, etc. And you’ll see why it’s not a good idea to ask for his math here in just a moment. And in a few minutes here. We’re gonna wrap up on that point.

24:44

Once you use it throughout your life as a as your own bank,

24:48

okay, but here’s the thing, the biggest that’s a side issue, that’s a side issue, but your first issue was, you know, he’s gonna have all this money at retirement. Well, let’s just do a little present value calculation on what you put in for a baby $5,000 a year for 13 years. Do you know what that would be in a mutual fund? Nada, it would be $25 million. Dude. He’s

25:13

all right. We just had Dave do some math. So let us do a little bit of this math with him. So what Dave just said was this guy was gonna be able to put I’m gonna try to be more accurate $5,373 a year for 13 years. And I had to mess around because of course, like you might imagine, Dave doesn’t say what interest rate he’s using. Why? Because then people could double check his math and see that he was wrong. It took me working around different interest rates. I’ve heard I’ve never heard him use seven and a half percent before. But maybe now he’s trying to make amends for all the years that he said 12% unabated like you could go get a mutual fund. That would dependably do 12. What you can’t, and maybe he’s doing like 10% return which would be like 100%, equity portfolio, all stocks, and then seven and a half percent after tax like best my best guess of what he’s doing. Because was as yet the person have $120,000 in 13 years. Then he said at eight years old. The gentleman said his son was one when they got the policy, which would be 74 more years of compounding. Is that right? No 64 more years old guys, we got to redo the math on Mr. Ramsey here. So that’s only 11 million. So let’s see what happens if we give a percent rate of return. Now, that’s 15 million, how high of a rate of return is Dave got to use to get to is 25 million lots more than 10 or less than 10? Nine? Okay, we’ll stick with nine, nine gets us to 28 point 8 million. Now keep in mind, that’s beyond 100% equity portfolio and beyond what you could do in any sort of fixed income portfolio. So he’s basically taking an asset that is treated by banks as triple A reserve capital, like the that top tier capital that they can lend against. And he is comparing it to what would be one of the most aggressive equity portfolios out there. And so this is my point in our conversation today. Yes, I want you to notice what a condescending guy Dave is. He’s just awfully condescending the people that call his show, in less, there are people that 100% except his doctrine, for how to plant, it treats you so good, even if you have some misunderstandings, as long as you’re doing his debt free scream, as long as you’re calling his show, and not asking questions that are critical. So that’s important to know that if you’re listening to his show, he’s not taking any critical feedback. He’s not taking any critical feedback from his listeners. And he’s not taking any critical feedback from anybody on his staff. Because anybody on his staff with a calculator would know, he just made a comparison of whole life insurance. One of the safest things like the financial planning board and all that, like classifies it the same as CDs at a bank. And yet turns around and compares it to a full on stock market investment, that kind which, by the way, stock market investments are great, we do lots of them for our clients, we manage a lot of money. But he’s making that comparison of an investment that will never go down in value to an investment that just in during COVID probably went down 30 40% In a matter of eight weeks. So he’s willing to make that comparison, because he’s doing it so far out in the future. And the point he made right after this point, which we don’t have time for today, but where he ends up going next is where you can borrow a lot of money out of those investments, yes. But when you take money out of the stock market, you are losing the return that the stock market had at that time, number one, number two, maybe your investment opportunity was going to be right when the market was down 40%. So you might effectively be able to take it out, but practically you’re not going to and lastly, this is giving his child a different kind of gift is something that the person calling in doesn’t talk about. But it’s really a neat gift to give your children life insurance that protects their insurer. ability their entire life, that puts them in the position, that no matter what happens to them as they’re a teenager in sports or something else, if something messes up, their ability to acquire insurance, they have an insurance policy will protect them and their family to some extent, so that if parents have that surplus, they already have their own life insurance properly squared away, it can be a great gift. Now, today, I didn’t make any commentary on the infinite banking philosophy, it was just curious that this man called saying in the part of whole life insurance, which we didn’t even get five minutes into the video. So this gives us a good part two, we ended about four hours and four hours, four minutes and 50 seconds. So we’re gonna pick up there next time. But the thing to take away is the guy got to his first question. And just already getting so hammered. I don’t think they’re gonna get around to talking about Infinite Banking at all. And while infinite banking is a technique to use, for those of you who’ve been exposed to it, I’ll say one thing, just so you know that, how I think about it. I think that too often, infinite banking can lead to people consuming more than they would have, and not creating the amount of wealth that they originally intended to with strategy. So with that, Corey should be back with us next week. We’ll pick up on a little more of this video with Dave. We’ll look forward to seeing you then next week. Please don’t forget, it means the world to us for you to like, subscribe, comment below, comment below on what you’d like to hear next, or put it in our podcast reviews what you’d like to hear next. And we will do our best to deliver it because we’re here to help you design and build a good life.

This Material is Intended for General Public Use. By providing this material, we are not undertaking to provide investment advice for any specific individual or situation, or to otherwise act in a fiduciary capacity. Please contact one of our financial professionals for guidance and information specific to your individual situation.

Sound Financial Inc. dba Sound Financial Group is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance. Insurance products and services are offered and sold through Sound Financial Inc. dba Sound Financial Group and individually licensed and appointed agents in all appropriate jurisdictions.

This podcast is meant for general informational purposes and is not to be construed as tax, legal, or investment advice. You should consult a financial professional regarding your individual situation. Guest speakers are not affiliated with Sound Financial Inc. dba Sound Financial Group unless otherwise stated, and their opinions are their own. Opinions, estimates, forecasts, and statements of financial market trends are based on current market conditions and are subject to change without notice. Past performance is not a guarantee of future results.

Each week, the Your Business Your Wealth podcast helps you Design and Build a Good Life™. No one has a Good Life by default, only by design. Visit us here for more details:

yourbusinessyourwealth.com

© 2020 Sound Financial Inc. yourbusinessyourwealth.com

———————————————————————————————————————————