Dave Ramsey is Wrong about Internal Rate of Return on Whole Life Insurance

Dave Ramsey has said many times on his radio show that whole life insurance is a terrible investment.  He likes to harp on his calculation of the internal rate-of-return (or IRR) on the premiums deposited and the resulting cash value growth, pointing out that the most you can ever hope for over many years with the IRR is 2.6 percent annually.
But let’s consider how whole life works.  The insurance company calculates mortality rates (death rates), their overhead expenses and then investment returns. The problem with Ramsey’s claim is that he is comparing apples to oranges, comparing a whole life policy to a mutual fund. Mutual funds don’t pay $500,000 if you die, for heaven’s sake but whole life does! And whole life pays at age 88, or at age 92, or age 105.  Whole Life is always there to pay your beneficiaries a tax-free death benefit as long as you pay the premiums.
For the sake of argument, let’s use Ramsey’s way of thinking in pushing mutual funds as a good investment and see where they fall short in some ways compared to whole life.  Mutual funds have fees, sales charges, on-going trading costs and market risks.  If the market goes down at a time in your life you plan to retire, oops!! You just had an unpredictable event.  Whole life returns are not based on the market so you can predict how much money you will have and how long it will last at any age in your life.  
Let’s say you place $5,000 into a mutual fund… how much money would your beneficiaries get back when you die? Net of cost, probably close to $4,885.  Now place $5,000 into a whole life policy…how much do you get?  Answer is $500,000 tax-fee!!  Now let’s go down the road 10 years while depositing $5,000 each year into a mutual fund and the same into whole life.  The mutual fund is totally unpredictable.  You may very well LOSE 25 percent of this money.  However, the whole life policy has a 150-year history of always being there at 2.6 percent  (if you use Ramey’s calculations). This means you will have cash values of $56,274 you can use or in the case of death, $500,000 for your loved ones, tax-free. Upon death at the end of 10 years, this is a 47.4 percent tax-free IRR.  If you continue these calculations out for 20 and then 30 and further to 40 years, the lowest IRR your family will receive is a 12 percent tax-free death benefit.
How would your mutual fund have done?  Don’t know, plus the gains are taxable. All the gains in a properly structured whole life policy, while living, are tax-free.  So the 2.6 percent IRR is an effective IRR of 3.4 percent in a 25 percent tax bracket.  In today’s unsettled economy, a 3.4 percent IRR predictable rate is still very attractive, especially when you just might die.  All through the years, you have access to the cash values inside the whole life policy to use as you wish, even to finance your own loans so you don’t pay principal and interest to a financial institution. By saving all that principal and interest on your debts, the IRR could be equal to 48 percent, not 2.6 percent.
Why does Dave Ramsey insist on comparing apples to oranges?  The answer could be that he has an interest in a term life insurance company.  It could also be that he has never seen a properly structured whole life policy? Properly structured, a whole life policy will be worth a fortune to you.  I suggest you think out of the box and see how such a policy can help create additional wealth for you and your family.  One thing I am quite sure of, is that you will die and when you do, owning a whole life policy will far outshine a measly mutual fund.