Some people are known for saying things in a way that hurts no one's feelings. Ramit Sethi is not one of them. Sethi -- the child of Indian immigrants -- is as blunt as they come, and that's what millions of followers love about him. Despite (or because of) his sometimes-gruff opinions, there's something about Sethi that makes him hard to dislike. Even when he's at his most blunt, it's clear that he's acting as a financial protector. One group Sethi is not afraid to stand up against: anyone who sells whole life insurance.
So what is whole life insurance?
Whole life is a type of permanent life insurance that offers protection throughout your lifetime, provided the policy is paid, keeping it in effect. Agents often sell it as an investment that also provides death benefits to your beneficiaries. That's because a whole life policy offers guaranteed cash value and may earn dividends.
What is Sethi saying?
Sethi outlines his reasons for believing whole life is a bad investment in his book, I Will Teach You To Be Rich. He continues to dissuade followers from buying whole life insurance through personal appearances, Facebook, Twitter, Instagram, and his I Will Teach You To Be Rich blog.
It's no surprise that insurance agents selling whole life insurance are less than pleased with Sethi. It should also come as no surprise that Sethi does not care how insurance agents feel about him. With over 1 million people reading his blog each month, he knows his audience is watching -- and he's not backing down.
His Instagram page shows a somber-looking Sethi with a caption reading, "My face when I post whole life insurance is a scam, and 200 insurance salesmen DM me to tell me I'm wrong."
On Twitter, Sethi wrote, "Guys, if your 'financial advisor' recommends life insurance for your portfolio, they're making a fat commission, and you are 99% being scammed."
He went further on Facebook, writing, "If your financial advisor sells you a whole life insurance policy, it's almost always a scam."
Naturally, some readers have pushed back, although it's not clear how many of them sell whole life policies. At one point in the conversation, Sethi wrote, "I hate ordinary people being taken advantage of with obfuscated, near-extortionate fees. Not on my watch. If they were honest and transparent about the fees and the actual returns compared to a simple index fund, fine! You want to spend hundreds of thousands of dollars on a worthless policy? Be my guest! But these salespeople are never clear about the actual costs. More in chapter six of my book."
He finished by adding, "If you're an insurance salesman, send your angry email to email@example.com. I'll be sure to read it."
What's not to like about whole life insurance?
While there's no clear consensus, it's fair to say that most financial experts are not fans of whole life insurance, meaning Sethi is in good company.
There are two primary types of life insurance: Term and permanent. As the name implies, term life insurance covers you for a set period, typically between five and 30 years. As long as your premiums are current, your policy is active. Once the term is up, the policy deactivates. You don't owe any more money, but you don't get any money back, either.
On the other hand, whole life insurance covers you as long as you continue to pay the premiums. A portion of each premium goes toward building cash value -- money you can borrow against. So, in addition to the death benefit your beneficiaries receive upon your death, there's cash you can withdraw or leave for your heirs.
Sounds good, right? Here are a few things about whole life an insurance agent may forget to mention:
- The premium for a whole life policy is much higher than for a term life policy, making it unaffordable for many.
- The tax-deferred growth that agents use as a selling feature is also available by investing in an IRA or 401(k).
- You're stuck with the investments the insurance company makes, and these investments tend to be very conservative, with lower rates of return than investment vehicles like 401(k)s or IRAs.
A whole life policy may have a niche market consisting of people who don't trust themselves to save and invest money independently. But as soon as they hand their first premium over to the insurance company, fees begin to eat away at any value they build.
That's not to say that whole life policies are universally bad. The problem is that there are so many other types of investments with lower fees and a better track record of making money for the account holder.
Sethi's frustration likely stems from the fact that some agents (who presumably know better) are good at selling whole life policies to people who would be better off without them.
So what's the answer? Fortunately, it's possible to have it all by purchasing a term life insurance policy instead of whole life, and investing the savings in a financial product with a track record of paying off.
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