Dave Ramsey says: Don't leave an estate with life insurance

By Dave Ramsey

Published: Tue, July 22, 2014, 12:00 a.m. MDT

 You dont use life insurance to leave an estate. Its a bad idea. You leave an estate by saving and investing.

You dont use life insurance to leave an estate. Its a bad idea. You leave an estate by saving and investing.

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Dear Dave,

My mom is 71 and debt-free. She’s investing $600 a month in a universal life insurance policy worth $250,000 because she wants to leave something behind when she dies. What could she invest this money in, other than the life insurance policy, in order to leave an estate?

— Steve

Dear Steve,

This is a good question. You don’t use life insurance to leave an estate. It’s a bad idea. You leave an estate by saving and investing. The only people who will tell you to use a life insurance policy to leave an estate are life insurance salesmen.

Unless she’s ill, I wouldn’t keep the policy. Instead, I’d do some long-term investing. It won’t take long to get to $250,000 with $7,200 a year. It’s the kind of thing that sounds like it’ll take forever, but you’ve got to remember you’ve got growth and interest in the equation. I wouldn’t put money into a life insurance policy at age 71 unless there’s someone being left behind who really needs the money — and it doesn’t sound like there is in this case.

It would probably take about 13 years for the money to turn into $250,000. Assuming she’s healthy, I’d rather do that and bet on her living. That way, she can leave an estate and avoid the expense and rip-off part of the universal life policy.

— Dave

Dear Dave,

I have a very large amount of student-loan debt. Where would that go in your Baby Steps plan?

— Jade

Dear Jade,

Baby Step 2 is where you pay off all debt except for your house. The fact that it’s a large amount of student-loan debt doesn’t change anything.

Hopefully, with your very large amount of student-loan debt, you also have a very large income. Believe it or not, there are some really sad situations out there where people have gone $200,000 into debt for a four-year degree in a field where they make $50,000 a year. That kind of thinking and behavior is ridiculous, but it’s out there.

Whatever you do, Jade, don’t treat this student-loan debt as if it were a mortgage. In other words, don’t let it hang around for years and years and years. You’ve got to get focused and intense about paying off this mess and getting on with your life.

Remember, your income is your largest wealth-building tool. You can’t save and plan for the future when all your money is flying out the door to pay back debt.

— Dave

Follow Dave on Twitter at DaveRamsey and on the web at daveramsey.com.

1. Diligent Dave
Logan, UT,
July 23, 2014

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 estate.

Salt Lake City, UT,
July 24, 2014

@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 attorney.

3. TaxMan
July 25, 2014

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).

4. T2
July 25, 2014

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 companies.

5. carman
Wasatch Front, UT,
July 25, 2014

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.