Dave Ramsey Said the Cheaper Version of Life Insurance Is the Better Option. Here’s Why He’s Right

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How often do you find a cheaper product that’s actually better than its costlier counterpart? 

When buying life insurance, the first key decision to make is whether to purchase a term or whole life policy. Whole life policies are more expensive, so they may seem like a better option. After all, costlier insurance should offer better protection, right?

Surprisingly, that’s not necessarily the case. Term life policies can cost considerably less than whole life coverage, and finance expert Dave Ramsey said they are a much better life insurance option for most people. Here’s why.

This is why Ramsey says to opt for a term life policy

When it comes to buying life insurance, Ramsey is very clear that the lower-cost term life policy is almost always a better option.

“Just like coffee, the cheaper version of life insurance is actually better (drip coffee, black!),” Ramsey said. “If you choose term life insurance (please do) it won’t cost nearly as much as some other bad options — like paying triple for that frappamacchialatte (which we all know isn’t coffee — it’s just a milkshake for adults).”

Ramsey went on to explain why term life insurance offers a better value for most people. The big issue is that whole life policies not only offer lifetime coverage most people don’t really need, but they also have an investment component. Part of the premiums go toward investments, and the policies accrue a cash value as a result of that. But the investment isn’t actually a very good one.

“Just like you’d expect ice cream from a business that also does dog grooming to be pretty crappy, the investments in a whole life policy are really crappy,” Ramsey said. “And the dog-hair-covered cherry on top? Tons of fees.”

Is Ramsey right?

Ramsey is completely correct that whole life insurance policies aren’t a great investment and not worth the extra cost.

Typically, it’s not too difficult to earn a far better return on investment by buying other assets rather than investing in a whole life policy. Consumers can simply take the money they save by buying a term life insurance instead of whole life insurance and use it to buy a safe investment such as an S&P 500 fund. Over the long term, they are all but guaranteed to end up with more money in the end than they’d have with a whole life policy.

Whole life policies also come with lots of restrictions on when and how the policy can be cashed in, and there are lots of fees, as Ramsey explained. These fees and restrictions can further reduce the value of the whole life insurance investment while also making it more difficult to access the funds.

The bottom line is, unless lifetime coverage is absolutely needed — which it rarely is — there is essentially no reason to buy a whole life policy. This would require paying more for a worse product, and that doesn’t benefit anyone.

Consumers looking for life insurance should shop for an affordable term life policy, find the right coverage at the best price, and put their investment dollars into a retirement or brokerage account that gives them the flexibility, options, and return on investment that they deserve.

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