I will resort back to science class for this blog. We will dissect something..a response to a caller's phone call. I feel financial advisors like Dave Ramsey are extremely DANGEROUS to the marketplace. He plays on the financial ignorance and fears of the average caller. This caller asks him a very direct question, and it is an excellent query. Watch the video and read my critique of his "bad advice" below..
Did you see the many errors in Dave's advice? There are plenty to go around, but I will focus on just his hypothetical that he created out of thin air. His hypothetical NEVER REALLY answers Tyler's question. Upon deeper inspection, it actually proves that Dave Ramsey is a total novice when it comes to Life Insurance needs.
I find it interesting that Dave Ramsey's answer is framed in a scenario that fits his reason for ALL people to purchase term insurance. The reason why Term insurance is cheaper than Permanent Life Insurance is because of the probability of death is much lower during the term period as compared to a Perm Life insurance period(to age 120). In fact, only 2% of claims are paid on Term Life insurance contracts. So does Dave know when folks are going to die? If he does than he is REALLY Good..NOT! Here is my critique.
First of all, in his hypothetical, he states that the 32 year old has a 20 year term and it expires at age 52 with a house that is paid for, $500k-$750k cash in Mutual funds in his 401k plan, and no need of any life insurance and debt free. Sound good, right? The guy dies at age 52 without life insurance. Smart advisor Dave states that the wife will be okay. This statement REALLY pisses me off!
The wife will NOT be "okay" based on Dave Ramsey's hypothetical. Here is why. The house is paid for, and the 52 year old leaves $500k-$700k in a 401k plan. Oh By the way..how does Dave Ramsey know for sure that this guy will have this much in his 401k plan? Can he put that claim in writing and guarantee this result? Nope! This $500k-$750 in his 401k plan will count towards his Estate Tax bill to the IRS in 9 months, along with that "paid for" house. Guess how the family will pay for this Taxable expense? If you said his 401k plan, go to the head of the class! So lets cut the 401k plan in half to $350k. Oh he never states the age of the surviving spouse. If she is 52, that money will be rolled into a IRA which she cant use until after age 59 1/2. This money is rolled so it will not be subject to taxation. That money will be taxed once she pulls it out of the IRA after 59 1/2. Now remember its only $350k, so she has to make sure that money is invested wisely. What conditions will the market be in at that time? Can she just "dollar cost" average to wealth? I think not. The house that is paid for: What happens if the Real Estate market when the spouse dies at age 52 is like today's market? The value can be lower and the surviving spouse needs liquidity. She will need to do the following: A) sell the house at below market price or B) refinance. If she refinances the house, the appraisal will be based on the local market or "comps" of this house. In a down market, she may not get as much as expected.
Here are some other considerations. The surviving spouse, she may have health challenges as she gets older. How will these needs be addressed? What life insurance does she have? Does she have an expired term life policy? If so, her premiums are 5 figures a year at age 60 and increasing EACH year. How long is that $350k going to last at retirement? My guess about 5-9 years, and she will be living with her children.
In my humble and honest direct opinion, Dave Ramsey is an arrogant,ignorant misguided advisor that needs to step down from giving out advice. His advice in this scenario PROVES that he has NO business discussing Life Insurance how it relates to people's lives.