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Whole Life Insurance Explained

Whole Life Insurance Explained

Update: 2024-05-31
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A caller, Missy, is considering cashing out her whole life insurance policies to pay off debt faster. She's aware that Dave Ramsey doesn't recommend whole life insurance, but she wants to understand the policies better. The hosts explain that whole life insurance is often overpriced and a poor investment compared to term life insurance. They emphasize that the primary purpose of life insurance is to cover income for dependents in case of death, and recommend a policy amount of 10-12 times annual income. They also point out that whole life policies often have low rates of return, making them less attractive than investing in growth stock mutual funds. The hosts advise Missy to get term life insurance in place and then cancel her whole life policies, even though there may be surrender fees. They encourage her to read the "Investing Traps" chapter in Dave Ramsey's book "Breaking Free From Broke" for more detailed information on permanent life insurance.

Outlines

00:00:00
Introduction

This Chapter introduces the episode of Ramsey Everyday Millionaires, where they discuss investing, retirement, building wealth, and outrageous generosity.

00:00:21
Caller's Question about Whole Life Insurance

This Chapter features a caller, Missy, who is considering cashing out her whole life insurance policies to pay off debt faster. She's aware that Dave Ramsey doesn't recommend whole life insurance, but she wants to understand the policies better.

00:06:10
Advice on Life Insurance and Investing

This Chapter provides advice on life insurance and investing. The hosts explain that whole life insurance is often overpriced and a poor investment compared to term life insurance. They emphasize that the primary purpose of life insurance is to cover income for dependents in case of death, and recommend a policy amount of 10-12 times annual income. They also point out that whole life policies often have low rates of return, making them less attractive than investing in growth stock mutual funds. The hosts advise Missy to get term life insurance in place and then cancel her whole life policies, even though there may be surrender fees. They encourage her to read the "Investing Traps" chapter in Dave Ramsey's book "Breaking Free From Broke" for more detailed information on permanent life insurance.

Keywords

Whole Life Insurance
A type of permanent life insurance that provides coverage for your entire life, as long as you pay the premiums. It also builds cash value that you can borrow against or withdraw. However, whole life insurance is often overpriced and a poor investment compared to term life insurance.

Term Life Insurance
A type of life insurance that provides coverage for a specific period, such as 10, 15, or 20 years. It is typically much cheaper than whole life insurance and is a good option for people who need coverage for a limited time, such as while they have young children or a mortgage.

Cash Value
The accumulated value of a whole life insurance policy that you can borrow against or withdraw. However, the cash value is often subject to fees and penalties, and it may not grow as quickly as other investments.

Death Benefit
The amount of money that your beneficiaries will receive when you die. The death benefit is typically the face value of the policy.

Rate of Return
The percentage of profit or loss that you earn on an investment. Whole life insurance policies often have low rates of return, making them less attractive than other investments.

Growth Stock Mutual Funds
Mutual funds that invest in stocks of companies that are expected to grow rapidly. Growth stock mutual funds can provide higher returns than other investments, but they also carry more risk.

Self-Insured
A situation where you have enough assets and income to cover your financial needs without needing life insurance.

Surrender Fees
Fees that you may have to pay if you cancel a whole life insurance policy before it matures.

Dave Ramsey
A well-known personal finance expert and author who advocates for a debt-free lifestyle and investing in growth stock mutual funds.

Breaking Free From Broke
A book by Dave Ramsey that provides advice on personal finance, including how to get out of debt, build wealth, and invest wisely.

Q&A

  • What are the main differences between whole life insurance and term life insurance?

    Whole life insurance provides coverage for your entire life and builds cash value, but it is often overpriced and has a low rate of return. Term life insurance provides coverage for a specific period and is much cheaper, making it a better option for most people.

  • Why is it generally not recommended to cash out whole life insurance policies?

    Cashing out whole life insurance policies can result in losing the cash value and paying surrender fees. Additionally, the money you receive from cashing out may be subject to taxes. It's often more beneficial to keep the policy in place and invest the money you would have used to pay premiums in other investments.

  • How much life insurance should I have?

    A general rule of thumb is to have 10-12 times your annual income in life insurance coverage. For stay-at-home spouses, a minimum of $500,000 is recommended.

  • What are some good investment options for the money I would have used to pay whole life insurance premiums?

    Growth stock mutual funds are a good option for long-term investing. They can provide higher returns than other investments, but they also carry more risk.

  • What is the "Investing Traps" chapter in Dave Ramsey's book "Breaking Free From Broke" about?

    This chapter provides detailed information on permanent life insurance, including the different types and their pros and cons. It helps readers understand the potential pitfalls of investing in permanent life insurance and how to avoid them.

Show Notes

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Whole Life Insurance Explained

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