Dave Ramsey blasted this one specific investing approach when a concerned Arizona dad called in — why you should avoid it like the plague

Besides offering hours of mindless scrolling, TikTok also doubles as a hub for quick and accessible financial advice — some of it sound and some … mindless.

If you find yourself in #FinanceTok, you’ve probably stumbled upon videos that advocate for whole life insurance.

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But unless you want an earful, don’t bring the topic to finance personality Dave Ramsey.

Americans call into Ramsey’s podcast every day lamenting their poor financial choices — and desperately hoping to dig out as they take in his stern-but-thoughtful advice. One Arizona dad, however, absorbed the full force of Ramsey’s blunt counsel as he explained in a recent episode that his 23-year-old son had invested in whole life insurance, based on his prompting to start investing and thinking about his future.

According to the American Council of Life Insurers 2023 Life Insurance Fact Book, Whole Life and Endowment policies accounted for 29.5% of all individual life insurance policies purchased in the U.S. in 2022.

Whole life policies, which are typically permanent and designed to cover you for your “whole life” at a locked-in rate that never goes up, allow you to borrow against your policy’s cash value down the road.

However, Ramsey argues they’re “the payday lender of the middle class.” Here’s why they get him so heated.

“Middle class … for the rest of your life”

Ramsey is all about wealth-building and rising above your current financial station. He’s anti-debt and wants to make sure folks save enough for a rainy day or retirement without having to resort to credit cards. Nothing, he said in his rant, will keep you stuck like a whole life policy: “It’s a signal that you intend to be in the middle class and stay there for the rest of your life.”

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He lays out the numbers: The average whole life policy, Ramsey said, earns a 1.2% return. And if you manage to somehow build wealth in it and want to use that money, you have to pay the insurance company interest to use it. Now you’re just losing money.

High costs

Whole life insurance premiums cost more than term life insurance — which as the name indicates, covers you for just a set term in your life. Ramsey claims whole life can average 20 times more than term policies.

For example, where a $100,000 term life policy might cost $5 a month, a whole life equivalent would run you $100 a month. But you should expect to pay even more than that. On average, a generally healthy 30-year-old who doesn’t smoke will pay $400 a month for a $500,000 whole life policy, according to Policygenius.

And for the first three years of payments, the insurance company keeps every dollar you invest as commission, which means you won’t see any growth during that time.

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Low returns

To be sure, whole life insurance offers guaranteed returns. But even after investing for five decades or longer, those still average around only 2% or less. If you have the means to invest for 50 years, you’ll do better with stocks, mutual funds or real estate.

Even normally conservative CDs or savings accounts — especially today’s popular high-yield varieties — can earn you 4% or higher.

Consider, too, how life insurance policies work with inflation, which currently outpaces a whole life policy’s paltry returns. Even coming off its 2022 highs, the October 2023 U.S. inflation rate ran nearly double the common return of whole life policies.

Lining others’ pockets

There’s nothing like watching your hard-earned money wind up in someone else’s pocket, right? Why should the money you intentionally invest to benefit you and your family upon your passing instead go to an insurance salesperson?

All insurance policies set aside a cut for sales commissions, but remember that whole life insurance takes 100% of your payments for the first three years — and the fees stay in place after that. It could take a decade or more before your cash value equals the amount you paid in premiums and fees.

As Ramsey grimly lays out, you’ll just see a bunch of zeros (and only zeros) on your investment’s cash value for the first few years.

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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.