The Best Advice Dave Ramsey on Life Insurance
The Best Advice Dave Ramsey on Life Insurance
The purpose of life insurance is to take care of your family if something unexpected happens to you.
You don’t want to buy too much, but you should have enough to ensure that they’re well taken care of when you’re not here any longer.
Dave Ramsey recommends people have 10 to 12 times their annual income in a good, level term life insurance policy.
However, if you have a solid reason to believe your income will be jumping significantly soon, there’s nothing wrong with basing your coverage amount on that figure – if you can afford it, of course.
Should I buy whole life or term insurance?
Honestly, there is not one clear answer to that question, period.
When you hear the rants of various financial gurus vs “hardcore” whole life insurance agents battling, you’d think people would come to the reasoning that the answer lies somewhere in the middle.
In short… I will say, it depends.
Some people are just not comfortable picking and/or monitoring investments and as such are risk adverse. If you are risk adverse should you invest the money anyway? After all, the gurus say this is what everyone should be doing, right?
The reality is, plenty of people will continue to be uncomfortable with investments they don’t understand.
It is not reasonable to expect them to start investing.
These opinions are based on their personal knowledge and fear of the market and its risks.
Dave Ramsey Whole Life vs Term Insurance
Dave comes at whole life insurance with an apparent attitude.
He believes/markets that you can easily build up financial resources by investing the difference saved in buying term life insurance vs whole life insurance.
The difference is placed in the market and you anticipate an 7-8% a year return.
You know, it can work.
Problem is…there is NO guarantee at all. What happens if 2008 strikes again? Many people lost 50% of their mutual fund growth as they naturally got scared and pulled it all out. We’re they stupid? No, just human and feared losing it all.
How many people lost money on their whole life insurance policy…zero!!
Did the cash value increase, yup.
Is it an investment, no!!
Many people have died with their whole life policy in force since 2008 and it has paid out way beyond the amount of premium put in their policies. It was completely unaffected by the market.
Their beneficiary received tax free money too.
Dave Ramsey on Life Insurance
Dave Ramsey and Suze Orman with their term life insurance arguments, do have sound thoughts, but they are operating from an assumption that people are buying life insurance for all for the same reasons.
They assume that years of investing can’t crash down and take years to recover.
Also assumed is that everyone has the comfort level with investing and/or the resources to even do so. That is a major flaw.
Only life insurance can guarantee wealth transfer when it is needed and is done typically, tax free.
That is why many wealthy people use permanent life insurance to see that their estate values are preserved.
It is also why many seniors protect there loved ones from even the expense of a burial costs.
Dave Ramsey on Life Insurance: Term Life Insurance
With term life, young and healthy policyholders can purchase hundreds of thousands of dollars of death benefits for less than $50 a month. This appears a wise and easy choice for young adults, who often are early in their careers, may be starting a family and may still have student loans to pay off.
Indeed, for young adults, low-cost term life policies purchase as much if not more death benefit for a lot less than the alternative, often referred to as permanent or cash value life insurance.
Orman and Ramsey hate all cash value life insurance products and rarely miss an opportunity to say so.
They advise their followers to always buy term life and invest the savings (versus more expensive permanent life) in the stock market.
Does anyone ever actually buy term insurance and invest the difference?
As an interesting aside, I’ve never met anyone who actually bought a term policy, checked around to get the cost of a permanent policy with the same death benefit, and then invested the difference in a mutual fund every month.
For most people, “buy term and invest the difference” translates into buy term and spend the difference. But let’s get back to the conventional wisdom about this…
In theory, by the time term policyholders reach their 50s and 60s, they’ll no longer need their policies because their investment portfolios will have ballooned to such a massive size that they will be wealthy enough to self-insure in the event of their death. In other words, they won’t need life insurance because their estate will be rich enough without it.
The term life theory is further bolstered by the expectation that by the time policyholders are nearing or in retirement, they will be empty-nesters, no longer having to look after the financial well being of their children, much less their elderly parents.
So many people who bought term life policies in their 20s and 30s are now in their 50s and 60s and — surprise! — their stock market portfolio never did grow at the annual 12% rate that Ramsey touts. In fact, many of these Orman-Ramsey devotees have yet to regain the dramatic losses they suffered during the 2008 market crash, and even the 2000 crash before that.
Their kids, generally, did move out to attend college and even enter the job market. But many of those adult children have moved back in with mom and dad, unable to support themselves and the high cost of living. And — bless them — grandma, granddad or both are often still alive and also need financial assistance.
For these aging baby boomers, the financial consequences should they perish haven’t changed much: If they were to drop dead today without insurance in place, many of them would leave their loved ones in the poor house.
Dave Ramsey on Life Insurance: You decide
Conventional wisdom directs us to buy term insurance. We hear this everyday from the Dave Ramseys and Suze Ormans of the world: “Buy term and invest the difference.” We have found this advice to be a destroying factor in building wealth. Here are some of my thoughts.
- I read in the posts here that you should have 10X-20X of your salary in life insurance. If you knew you were going to die tomorrow, how much life insurance would you buy today? I hope your answer would be, “The most I could get!” That’s what mine is. If your house or your car was destroyed, wouldn’t you want it replaced for its total value?
- In the posts, people have made the comment that whole life premiums are expensive. I will agree that the premiums are higher than term. But have you asked yourself why? Is it possible that you could make this a productive tool? Could you use the cash value that is in the policy to act as your personal bank? Remember, good things are seldom cheap and cheap things are seldom good.
- Self-insurance. This term is a fallacy. You are either insured or not insured. The purpose of insurance is to replace lost value or production. If you “self-insure” then the assets you are protecting cannot be used because they are now being used as insurance. Picture this: You have a $100,000 home, free and clear, and you have $100,000 in the bank. You choose not to insure your home. If your home burns down, now you use that $100,000 that you had in the bank to buy your new home. What just happened here? You have effectively decreased your assets in 1/2. If you had insurance, you would be in a better position.
- The only people that have a real need for life insurance are those on whom people are depending for their livelihood – Dave Ramsey. They also go on to inform that if you buy insurance too late, become ill or disabled, then the premiums will be expensive. Do you catch the flaw here? If you wait to get life insurance until someone is dependent on you, you run the risk of not being able to get it at all. And why does someone have to dependent on you? Do you have charities or other causes that would like to contribute to when you die? If you plan on getting married or having kids, would you consider getting insurance now when premiums are lower?
- When will term insurance give me the biggest bang for my buck? If after I signed the policy and immediately was struck by lightening and died, that’s when I have my greatest return. Otherwise, it is an expense that gets greater and greater. Why do you think it’s so cheap. It’s because only less than %5 percent of all term policies pay out in death benefits.
Last note, I would say if your goal is to become wealthy, do what the wealthy do. They, along with banks, generally invest in whole life policies rather than term. Turn your brain on and start to ask why…
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