Think that all life insurance policies are the same?
Not sure if your coverage is sufficient to cover your family’s needs in case of the loss of you or your spouse?
Life insurance can be a daunting thing to consider. At its core it covers two areas most of us aren’t comfortable examining:
Our mortality and our finances.
Life insurance protects our loved ones if something were to happen to us.
It provides a financial windfall designed to help ease financial struggles in the emotional fallout of death.
Pretty depressing, right?
It also forces us to assess our current financial situation to both establish how large a policy we can afford and how much we’d want our loved ones to have in case of our passing.
That’s not a whole lot brighter, is it?
Luckily there are a few common sense approaches that can help keep things in perspective and ensure that we’re getting the most value for our dollar in choosing policies.
Financial guru Dave Ramsey has strong opinions about life insurance. As one of the most recognized financial advisers in the country, we’ll examine his approach and whether it’s recommendable or not.
Who Is Dave Ramsey?
A former real estate mogul, Dave Ramsey, is best known for his financial columns and many broadcasts the he contributes to a variety of media.
As an author, broadcaster, and motivational speaker and spokesperson for the online life insurance company Zander Insurance, he’s known for his rigid and disciplined approach to financial management.
Below we’ll take a look at some of his core advice concerning life insurance. We’ll tell you whether it’s worth bearing in mind when choosing the policy that’s right for you and your family.
Dave Ramsey on Cash Value Life Insurance
Cash Value Life Insurance is a bundled package that pairs life insurance with a savings plan. It’s designed to maximize your monthly payments for the largest possible payout.
Dave Ramsey takes a strong stand against this type of investment. He argues that the returns are below market average and that the associated costs and fees with such a policy eat up too much of your money.
In this regard, he’s right. The better option is to find the insurance policy that satisfies your needs and then invest the difference in savings of your own choosing.
This allows you to maintain control of your investments without having to pay someone else for doing the work.
Get Coverage Far Greater Than Your Earnings
It may seem like a year or two worth of income will leave your spouse and family in a good spot to pick themselves back up. In reality, choosing a higher value policy actually allows for more freedom.
As Dave Ramsey argues, choosing a policy that is 10-12 times your income allows your family to invest the insurance payout and live off of the returns.
The financial freedom available here can ensure that your family can be financially secure long after you’ve passed.
Get Life Insurance When Your Young
We often don’t consider life insurance until well into adulthood.
But is it more cost effective to buy young and healthy or older and with a greater risk of illness?
By securing a policy when at peak health you help guarantee a low rate while giving you the security to know that your loved ones are protected in a worst-case scenario.
Not only that, but the longer you wait the greater the risk of some unforeseen occurrence taking place.
Choosing the Right Length of Term Life Insurance
How long will you need coverage for?
It can be hard to think of what the ideal length of insurance policy to take out based on our needs.
The solution Dave Ramsey offers is a practical one: consider how long until your children achieve financial independence.
Think about how many years it will take for them to finish their schooling and establish a life on their own.
This gives you a good idea of how long you’ll require coverage for.
As we get older we should have less debt and more equity. If you plan on being mortgage-free and with little to no debt by retirement, then life insurance is no longer needed.
It’s not just that your premiums will go up as you age, but that your spouse and family will be able to cash out the equity you’ve accumulated throughout your life.
Monthly insurance payments at this stage of your life will just chip away at that equity.
However, the math Dave Ramsey offers here doesn’t quite add up. His approach of buying term coverage and investing the rest in mutual funds depends on a predictable growth in the market.
This is not only impossible to plan for but also fails to consider associated fees that come with mutual funds.
So while Ramsey’s recommendation does seem logical, only a dedicated financial advisor can help you understand your current situation and future needs.
Insurance Add-Ons Add Cost
One of Dave Ramsey’s final recommendations is to bypass any insurance riders that your provider may suggest.
These are often more specific payouts like income replacement or waiver of premium.
These add-ons tend to play on your emotional concerns. Often, though, their benefits aren’t worth their extra costs.
The smarter option is to stick with a more standard policy. You can invest the difference in a way of your choosing. This allows you greater control of where your money goes while protecting you from additional fees and premiums.
Is Dave Ramsey Right about Insurance?
There’s a reason Dave Ramsey has become such a prominent personality in the financial advice world.
He offers solid advice with very specific and actionable recommendations.
It’s important to note, however, that the attitude he espouses isn’t a unique one. What he excels at is pushing a common sense approach to managing your insurance options.
There is value in what he says. What is more valuable, though, is to adopt his approach. Understanding why you’re taking these steps is a lot more empowering than just following the advice.
By recognizing that life insurance is just a tool to ensuring financial security you gain the confidence to consider other investment options.
If you still have questions or want to discuss your options a little further, we’re always here to help.