Dave Ramsey's Baby Steps and a Participating Whole Life Policy: How a Canadian Family Can Use Both, Step by Step

For years, two camps have talked past each other.

In one camp is Dave Ramsey, whose program has walked millions of families out of debt. He tells them to buy term life insurance, invest the difference and never put a dollar into cash value life insurance. In the other camp are insurance professionals who use participating whole life policies to help families finance their lives through policy loans, the approach R. Nelson Nash described as what is known as the Infinite Banking Concept®. When his calls on the subject were posted online, advisors answered with video after video, and the comment sections filled with people who felt they had to choose a side.

I do not think families have to choose a tribe. I think they deserve to know where the two approaches agree, where they genuinely differ, and how a Canadian family could use the strengths of both without the weaknesses of either.

Why does this matter? Because the people caught in the middle are real households making real decisions. A family that has just finished paying off its last credit card, with a full emergency fund in the bank, is exactly the family both camps are speaking to. If that family hears only one side, it may miss something valuable. If it tries to do both carelessly, it may start a policy too early, or borrow against it too freely, and undo the discipline that got it there.

So this page does three things. It explains his program fairly, in his own terms. It reports on the public debate as it stands. And it sets out, step by step, how the two can work together, honestly marking the places where he would disagree with us.

Here is how it fits together.

What is The Total Money Makeover, and what are the Baby Steps?

The Total Money Makeover is Dave Ramsey's plan for getting out of debt and building wealth, set out in seven Baby Steps: a $1,000 starter emergency fund, paying off all debt except the house with the debt snowball, a full emergency fund of three to six months of expenses, investing 15% of household income for retirement, saving for children's education, paying off the home early, and building wealth and giving.

Ramsey Solutions publishes the seven Baby Steps on its website and describes the plan as thirty years old. They are deliberately simple, and their order is the point. Each step is finished before the next begins, so a family focuses all of its energy on one thing at a time.

Two features deserve respect before anything else is said.

The first is the debt snowball. Mathematically, paying the highest interest rate first can cost less. He chose the smallest balance first anyway, because people who see a debt disappear keep going, and people who keep going finish. He designed for human behaviour, not for a spreadsheet. That is wisdom.

The second is the emphasis on cash reserves. A family with a real emergency fund does not need to borrow when the car breaks down. That single habit prevents more financial damage than any product ever sold.

His program asks for intensity, and it gets results. Nothing on this page asks a family to skip a step.

What is the online debate actually about?

At its core, the debate is about where money should wait and how purchases should be financed. He argues for term insurance, investing the difference and paying cash. Advisors who use participating policies argue that a well-designed policy can be a family's financing reserve. Both sides tend to overstate their case.

If you search for his name and this subject, you will find his broadcast calls and a long line of responses from advisors. As a reporter would put it: he calls the approach a scam and whole life a terrible investment; they answer that he misunderstands how a participating policy works and how policy loans are used.

Having listened to both, here is how I would summarize it fairly.

• Where his critics are right: several of his specific claims about how participating policies, dividends and the cash value work do not hold up under Canadian law. We checked each one, quoted and sourced, on Dave Ramsey on Whole Life Insurance and Policy Loans: Each Claim Checked.
• Where he is right: whole life is not an investment; it costs more than term for the same death benefit; badly designed policies build little value for years; policy loans carry real interest; commissions create a conflict; and many families should not buy one at all.
• Where both sides overreach: he speaks as if no family could ever benefit from a participating policy. Some of his critics speak as if every family should own one, as if the cash value grows untouched no matter how much is borrowed, and as if American tax rules applied in Canada. They do not.

The useful question is not who wins the argument. It is which parts of each approach help a particular family, in what order.

Where do the two approaches already agree?

On more than either side usually admits: no consumer debt, real cash reserves, living below your income, discipline about repayment, patience over decades, and generosity at the end. The disagreement is narrower than the noise suggests.

Put the two side by side and the overlap is striking.

Nelson Nash and Dave Ramsey would have argued about many things. But both told families to stop handing their future to lenders. Both demanded discipline. Both measured success over a lifetime, not a quarter.

Where do they genuinely differ?

In three places: whether life insurance should hold any savings at all, whether paying cash or financing through owned capital is better for large purchases, and how risk should be balanced against return. Those are real differences, and a family should understand them before choosing.

Here are the three honest differences.

1. Where long-term money waits. He wants it in investments, for growth, accepting market ups and downs. A participating policy holds money in an insurance contract with guaranteed values and dividends that are not guaranteed, giving up some potential growth for stability, permanent coverage and the ability to borrow against it.
2. How large purchases are paid. He says save and pay cash. Nash taught that paying cash also has a cost, because the money you spend stops earning. The policy approach finances a purchase through a policy loan and repays it, so the capital is rebuilt for the next purchase. Both avoid outside lenders; they differ on where the cash waits before it is spent.
3. What insurance is for. He sees life insurance as temporary protection while children are young. The policy approach sees permanent coverage as a lifelong asset, with a death benefit that is paid whenever the insured dies.

Each difference involves a trade-off. Neither side is foolish. The right answer depends on the family's income, stability, health, age, goals and temperament.

How can a Canadian family use both, step by step?

Follow his first three steps exactly as written. Do not start a participating policy while carrying consumer debt or without a full emergency fund. From the fourth step on, a family that needs permanent life insurance can consider a policy alongside the later steps, with professionals, and use it for financing only once it is built.

Here is the sequence I suggest families discuss with their advisors. Where he would disagree, I say so.

Let me walk through the key moments.

Steps 1 to 3: no policy yet

These steps stay exactly as he writes them. His program shines here, and nothing in the policy approach improves on it.

A participating policy asks for premiums for many years, and its early cash value is smaller than what you pay in. A family with credit card balances, a car loan or no emergency fund is not ready for that commitment. Start a policy too early and you risk the worst outcome: a family under pressure that stops paying premiums, surrenders in the early years and loses money.

One adjustment matters. If you already own a policy when you start the Baby Steps, do not surrender it in a panic because a radio host dislikes it. Ask an experienced insurance professional to review it with you: its guaranteed values, its premium flexibility, its loan value and what surrender would cost you. Some policies are worth keeping and reducing; some are not. Decide with the facts.

Use his third step for something else too: a protection review. How much life insurance does your family actually need, for how long, and is any of that need permanent?

Step 4: where the conversation begins

This is the first point where a participating policy deserves a conversation, and only for families who need permanent life insurance. He would put all of the 15% into investments. Some families choose to direct part of their long-term savings to a policy instead, as insurance first and a financing reserve second.

This is where he and we part ways, and I would rather say so than hide it. In his program, retirement savings go to investments, full stop. In Canada, the registered plans he would compare to his American accounts are the RRSP and the TFSA.

A family that needs permanent coverage might reasonably ask its professionals a different question: should part of our long-term savings go into a participating policy that provides that coverage, builds guaranteed values and becomes a reserve we can borrow against? That is not a question about which product earns more. It is a question about what role each dollar plays. The answer depends on income, tax brackets, the registered room available, health, age and how much permanent coverage is actually needed.

What must not happen is a policy funded so heavily that the retirement plan starves, or a policy described as an investment. It is neither a substitute for retirement savings nor a place to chase returns.

Step 5: the RESP comes first

For children's education, look at the RESP before anything else. The Canada Education Savings Grant adds 20% of the first $2,500 contributed each year, up to $500 a year and $7,200 per child over a lifetime. No life insurance policy offers a government grant.

This is a point where his discipline and Canadian rules line up neatly. The grant is the closest thing to free money a family will see, and the Canada Revenue Agency sets it out clearly: 20% of annual contributions on the first $2,500, $500 a year per beneficiary, or $1,000 with unused room from a previous year, to a lifetime maximum of $7,200, for contributions made up to the end of the year the child turns 17.

A participating policy can sit beside the RESP, not in place of it. Some families use a mature policy as a financing reserve for the costs an RESP does not cover well, such as a first car or a move, repaying each loan afterwards.

Step 6: paying off the home, without draining the reserve

His sixth step stays. What a mature policy can add is a way to finance other large purchases, such as vehicles, through policy loans that are repaid, so that savings are not drained while the mortgage is being paid down.

He asks families to pay off the house early and to pay cash for cars. The tension is obvious: every car paid in cash slows the mortgage. A family with a mature, well-funded policy has another option: finance the car through a policy loan, repay it on a schedule as strict as a car payment, and keep its savings working on the mortgage.

That only works with discipline. The loan must be repaid. Unpaid interest is added to the balance, whatever is owing at death comes off the death benefit, and if the balance, interest included, grows past the cash value, the policy can lapse. Paying for a Vehicle walks through the sequence in detail.

Step 7: build wealth and give

This is the step where a participating policy fits most naturally: a permanent asset, a reserve for financing the family's purchases, and a death benefit that becomes part of the inheritance he encourages families to leave.

His last step asks families to keep building, to give generously and to leave something behind. A well-built policy does all three quietly. It provides permanent coverage, its cash value can finance purchases for decades when loans are repaid, and the death benefit passes to the people and causes the owner chooses.

The same discipline that carried the family through his second step protects the policy here. A policy is not a spending account. What Your Policy Is For explains why everyday costs come much later, and only with a plan.

How does paying cash fit with financing through a policy?

Better than either side admits. He tells families to stop paying interest to lenders. Nash taught that paying cash also has a cost, because spent money stops earning. A family that finances a purchase through its policy and repays it on a strict schedule honours both ideas.

His rule is simple: if you cannot pay cash, you cannot afford it. That rule has saved countless families from car loans and store credit that would have ruined them.

Nash's observation was different, not opposite. He pointed out that paying cash is also a form of financing: the money that leaves your savings account stops earning interest for you. Either you pay interest to someone else, or you give up the interest your money could have earned.

A policy loan sits between those two ideas. You do pay interest, to the insurer, and it is a real cost. But you are not dependent on a lender's approval, and the cash value that secures the loan stays in a contract your family owns. If you repay it as seriously as his debt snowball, the capital is rebuilt for the next purchase.

Here is the bridge in one sentence: pay cash in spirit, by treating every policy loan like a debt you are determined to eliminate, and finance in practice, through capital you own instead of a lender's.

What about term insurance?

For many young families who need large coverage on a tight budget, term insurance is the right first purchase, as he teaches. Term and participating whole life are not always rivals: a family can hold term for a large temporary need and a smaller participating policy for the permanent one.

He is right that a young family with a mortgage and small children may need far more coverage than it could afford in a permanent policy. Term insurance fills that gap at a low cost, and we recommend it for that purpose.

But the choice is not always one or the other. Many families need two kinds of protection: a large amount for the years when children are young and the mortgage is high, and a smaller amount that should last for life. Term can cover the first, a participating policy the second. Some term policies also include the right to convert to permanent coverage without new medical evidence, which keeps options open if health changes. His company presents a term provider as its "RamseyTrusted" partner; whoever you buy from, ask about conversion before you sign.

Who should help you put this together?

A licensed insurance professional with years of hands-on experience designing and servicing participating policies used for financing; an accountant who understands how policy loans and dividends are taxed under section 148 of the Income Tax Act; and, for the estate, a lawyer or, in Quebec, a notary.

The product without the understanding is just an insurance policy. The understanding without experience is just theory. A family combining his steps with a participating policy needs people who respect both: someone who will tell you to finish paying off your debts first, and who will show you a policy at lower dividend scales before you buy. In Quebec, that insurance professional is a Financial Security Advisor (conseiller en sécurité financière); in other provinces, a licensed life insurance agent.

I should be plain about my own position: I am paid by insurer commissions when a policy is bought. That is a conflict of interest, and it is one more reason the order on this page puts his first three steps before any policy at all.

How should you read the figures on this page?

The Baby Steps amounts ($1,000, three to six months of expenses, 15% of household income) are his program's own, as published by Ramsey Solutions. The education grant figures are the Canada Revenue Agency's. No policy value, dividend or loan rate is stated on this page.

Dividends on participating policies are not guaranteed and are declared each year by the insurer's board. Policy loans carry interest at the insurer's rate, are a disposition for tax purposes under subsection 148(9) of the Income Tax Act, and can produce income above the adjusted cost basis. Amounts are in Canadian dollars except his program's own figures, which are published in American dollars.

What this page will not tell you

This page describes how two approaches can be combined in general terms. It does not tell you whether you need permanent life insurance, how much, whether a policy suits your family, or how to divide your savings between registered plans and a policy. Those answers depend on your income, debts, health, age, goals and tax position, and they come from your insurance professional and your accountant.

Dave Ramsey, Ramsey Solutions, The Total Money Makeover and the Baby Steps are named here only to describe them accurately. This site is not affiliated with, sponsored by or endorsed by Ramsey Solutions, and the combined approach on this page is ours, not his.

Who this does not suit

This combined approach does not suit a family still carrying consumer debt, without a full emergency fund, with unstable income, or unable to keep premiums going for many years. For that family, his first three steps are the whole plan for now, and we would tell them so.

It can suit a family that has finished his first three steps, needs permanent life insurance, has reliable surplus cash flow, and wants to finance its future purchases through capital it owns. For that family, Infinite Financial Sovereignty® does not replace the discipline it learned in the Baby Steps. It builds on it.

He taught you to stop serving lenders. The next step is to build the capital that makes lenders unnecessary, and to treat it with the same discipline that set you free.