Dave Ramsey Said These Types of Insurance Policies Are Rip-Offs. Here's Why He's Right

Don't buy life insurance without reading this advice from Dave Ramsey. 

Finance expert Dave Ramsey recommends most people purchase life insurance. That's solid advice. A life insurance policy can help keep surviving family members from facing financial hardship due to funeral costs and loss of income after an untimely death.

But, while Ramsey is generally a fan of life insurance, there's one type of policy he absolutely does not recommend. 

In fact, he referred to these kinds of policies as "rip-offs" and warned that many people buy this kind of coverage only because they "lack the info" to make a better choice. 

Ramsey said to steer clear of permanent life insurance

So, what's the life insurance that Ramsey believes people should avoid? Permanent life insurance. Ramsey acknowledges these types of policies are commonly purchased, but he makes clear that buying them can be a huge mistake. 

"Even though all the different forms of permanent life insurance are way more expensive and confusing than term life, that doesn't mean they're not popular," Ramsey said. "We believe that's because many people just lack the info about these rip-offs."

Permanent life insurance policies include whole life coverage, universal life insurance, variable universal life insurance, and indexed universal life insurance. Ramsey isn't a fan of any of them because, as he explains, they are "trying to do two things at once" and aren't doing either as well as they could. 

The two things they're trying to do are to pay death benefits to insurance beneficiaries and to serve as an investment account. But most people only need to worry about a death benefit for a limited time while they have dependents. Eventually their loved ones won't need this protection, so there's little use in paying for it. And as for the investment component of permanent life insurance policies -- the investment is complicated, costly, and doesn't produce the returns you could get elsewhere.

Since permanent life is needlessly expensive and not a great investment, Ramsey recommends avoiding it entirely and opting for a term life policy instead. "Term life! It's the only way to go if you want to be smart, save money, and truly provide yourself and those you love with long-term peace of mind," the Ramsey Solutions blog reads. 

Is Ramsey right?

Ramsey has some great advice about life insurance coverage. 

The reality is that whole life policies cost significantly more than term life coverage (around five times more in many cases) and most people do not need permanent coverage. Consumers can also choose from many simpler investments that provide better returns and more flexibility than they would get if they buy a whole life plan. 

Rather than wasting money on whole life coverage, consumers who are buying insurance should look into a term life policy. After shopping around with several insurers, it should be easy to see why term life is the better deal -- as well as why buying this coverage is a lot less confusing than trying to navigate all of the different permanent life insurance options out there.

"Life insurance should be simple," Ramsey said. "That's why we recommend only purchasing a term life insurance policy. It's straightforward, inexpensive and designed to do one thing over the long term: support your loved ones if you die."