Life Insurance Advice from Dave Ramsey

Here's Dave Ramsey's take on life insurance:

The only people that have a real need for life insurance are those on whom people are depending for their livelihood. They should carry about 10 times their annual income on 20-year term life insurance.

Here's my take:

1. This is straight-down-the-middle advice, and it's what I do myself personally (for the most part -- see next point.)

2. Insurance on me is about five times my annual salary but that's because: 1) our annual living expenses are FAR below my annual salary (my life insurance is about 12 times our annual living expenses) and 2) we have a good level of investments that could help to support the family in case something ever happened to me.

3. I know there's a contingent of universal life, whole life, etc. readers on this blog, and I've got something to say on these offerings as well: 1) Most of these are VERY expensive, 2) they aren't good options for MOST people, 3) in certain circumstances, they are advisable, and 4) I'm working on having an agent write a post on when these forms of insurance are good deals. More to come.

For more of my thoughts on insurance, check out these posts:

• Buy Term and Invest the Difference

• 12 Ways to Save on Insurance

• What to Do When Your Term Life Insurance Expires

Comments

[rocketc]

I think the age of one's spouse and children is also a factor - if my spouse has the ability to work, I can carry less life insurance. I put the money saved into a mutual fund.

My life insurance will get my family completely out of debt and pay for two years of "life". As my wife gets older, I plan to increase coverage.

[GBlogger (Can I Get Rich On A Salary)]

My wife and I each have staggered policies, a 20-year term and a 30-year term. After the balance of the 20 years is up, two big expenses -- college for the kids and the mortgage on our home -- should be quite a bit less, so our insurance needs will go down quite a bit. We're also quite a bit less than the 10 times annual salary suggestion -- but have quite a bit of insurance in total.

[Traciatim]

In my case that would but my insurance needs between 400-500K depending on the year, and my spouses at around 50K . . . that doesn't seem right.

I realize this is just a rule of thumb and not for a specific situation, since she is starting a business it skews things.

I kind of like the rule of add up all your debt and then add up what it would cost for two years of schooling for the other partner to gain some better skills and/or job training and then they are on their own again. Since I include my mortgage in the debt if they can't live mortgage free on a fairly low income stress free life, they have more problems than I need to be worrying about from my urn.

[Anitra]

I was just listening to Dave Ramsey's show the other day, and he pointed out that for people like himself (who can afford to self-insure), life insurance becomes a luxury rather than a necessity. This is part of why he recommends term life insurance - the idea being that after 20-30 years, you should have enough invested that you no longer need life insurance if one spouse dies.

[Kevin]

My wife and I just got policies and ours are real close to the 10x figure, but we opted for 30 year term since we are around 30 and the prices were good. Figured we might as well lock in now.

[Kent Irwin]

I've been doing financial planning and insurance calculations for many years, and although the 10X will usually provide more than adequate insurance, I've found that 5 - 6x, plus debt, minus investment assets, usually gets me pretty close to the number the software comes up with. I still like to use planning software because it takes into consideration better the survivor's earned income, social security income (for spouse and children) and college education funding.

[Zook]

Good post Irwin. I agree.

I think far to many folks over insure themselves.

Is eFinPLAN your business?

[paidtwice]

Ramsey (in this snippet at least) misses a point a lot of people gloss over.

I'm the SAH spouse. I actually do work (in that, I have three part-time jobs, two from home and one I do when my spouse is here to take care of the kids) but we don't depend on my earnings for our livelihood. We depend on my spouse's salary to live.

But if I die, his expenses go up a TON. We have two under-school-age children, and they would have to go into full-time daycare. And he alone does not make enough to adjust his expense load up that considerably on top of the expenses we already have that his salary provides for.

Therefore we have a pretty substantial (for us) policy on me, too. My spouse has a much higher policy but mine is not peanuts. Just in case.

[rwh]

I'm grateful for Irwin's post as we carry about 5x our combined salaries in term life insurance and get another 3x or so from our fringe benefits packages at work. But we also have other assets and our kids aren't very many years from being out of school.

I was beginning to think we needed more life insurance!

Thanks Irwin.

[Kent Irwin]

Yes eFinPLAN is my business. As far as the length of the term, term insurance can be guaranteed annually renewable meaning the cost increases a little each year, and can last well into the upper ages. When you get older renewable gets more expensive because your life expectancy is shorter. Guaranteed level premium term insurance can lock the premium in for 5,10,15,20 years and longer. Try to time the length to coincide with children going out on their own, debt becoming small and retirement assets getting sizable. If you think you only need it for 15 years, price the 20 year policy to see if it is much more, it may only be slightly higher, and the extra 5 years of cushion may be helpful during the social security black-out period (the gap of time when you are ineligible for social security survivor income benefit, and before social security retirement benefit kicks in). Also note, after the guaranteed premium period runs out, the cost to buy a new term policy (if you can qualify because of health) or renew the existing one can be high.

[Zook]

MKV-

You have to be pretty savvy to enter that arena, but that could be a possibility if your term carries you into your 70's.

Insurance is just that. It shouldn't be some product with a golden parachute at the end. I won't be asking my car insurance company for something after a decade of paying premiums.

Insurance is a good thing when it is used correctly. I think all of the different products out there are far to complicated and take far to long to explain and understand. Even assigning a term policy over to a second party for a payment is probably going to confuse and turn off many folks.

[Kirk]

I concur that term is certainly better than permanent policies like whole or universal life. Almost 75% of permanent policies lapse within five years, which shows these policies are too expensive and are sold, not bought. Within 20 years, 90% have lapsed.

The only time to get permanent is if you have a business partnership, charitable goals yet want to leave an inheritance to beneficiaries, or to pay estate taxes.

Also, I have seen where people load up on life insurance, but fail to adequately cover their income through disability insurance. You have a much higher probability of becoming disabled than dying early. Get the disability.

[sow]

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.

1. 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?

2. 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.

3. 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.

4. 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?

5. 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...

[FMF]

Sow --

Thanks for sharing the life insurance industry's perspective with us.

I had breakfast yesterday with an honest insurance agent (imagine that!) who told me that permanent insurance ISN'T meant for most people. Yes, there are times when it is (such as wealthy individuals needing it for estate tax purposes). But saying that everyone needs it is certainly incorrect.

[sow]

I want to clarify that I am not saying that everyone "needs" whole life insurance. I'm not even saying anyone needs any insurance. I believe insurance is based on "wants". Do you want the value and production of your car, house, and life to be replaced in the event that they are lost? Do you want to transfer risk from yourself to another?

There are times, other that estate planning purposes, when whole life insurance is a powerful tool. What a lot of people don't know is that whole life insurance can be used as a "living" benefit and not just a death benefit (like term). You can velocitize your money with this product because it acts as an insurance, savings, and investment vehicle.

[FMF]

Sow --

I'm sure there are other instances when permanent insurance is an acceptable tool. That said, for the vast majority of people, my opinion is that it's not needed. You can't use the exceptions to a rule as a basis for an argument and expect to have much credibility.

BTW, that agent I mentioned will be doing a guest post for me on this exact topic sometime in the near future.

[sow]

What exception to what rule?

If we base this discussion on what most people "need" and what most people do, then how come most people aren't wealthy?

Robert Kiyosaki says that the rich don't do things slightly different than the poor and middle class, they do the complete opposite.

[Zook]

There ALWAYS seems to be one salesman.....errrrr....person that pops up in these insurance discussions with an over the top push towards a insurance product.

[FMF]

Sow --

I think you need to take a logic 101 course. Just because rich people often have permanent insurance doesn't mean that they got rich because of it (which is what you're implying.) Rich people eat cavier too. Maybe I should tell everyone to eat cavier so they can become rich? Come on!

[Zook]

Sow-

A 25-year old, married couple with no kids making $50,000 a year each. They are renting a house and don't plan to have kids for 5 to 10-years.

They are saving $7500 a year into their 401k's and manage to save $10,000 a year into their Roths. They have $30,000 saved up and zero debt.

Tell me exactly what insurance they need.

[MattC]

Sow -

Regarding #3 - self insurance. Dave does not recommend that you give up insurance on your house or cars (in fact, he even keeps comprehensvie coverage on his old jeep, because if it was wrecked he wants someone else to take the $3000 hit).

His point with self insurance is that if a husband dies at age 30 and leaves a widow with $500,000 in term life insurance, she should be able to replace his income. If a 60 year old dies with $800,000 in the bank, his assets should produce enough income to replace his. There is no need for term insurance at that point.

I have enough term that my wife could pay off our house and live a comfortable lifestyle off the returns (provided she works, she can't get too comfortable ;). This costs me about $25 a month for $500,000 worth of coverage. That's $9,000 for 30 years, and yes if I make it to the end of the term I get nothing.

How much would I pay for the same coverage under whole life and how much would the cash value be at the end of 30 years? If I died would my wife receive both the cash value of the policy and the face value of the coverage?

[MattC]

Robert Kiyosaki's advice I take with a grain of salt since he didn't appear to make his money in real estate but instead through Amway selling his books:

http://www.johntreed.com/Kiyosaki.html

[sow]

I'm not an insurance salesman, or even in the financial industry for that matter.

I understand that everyone's situation is different. I probably should have started off with that. Because, I do believe that term insurance does have its benefits in certain situations. But, I believe the power of investing is not in the product, but in the plan and process. If I was in Zook's situation, here are some questions I would ask myself.

1. Could I explore the idea of buying a house instead of renting so I can take advantage of the tax deduction, and possibly build equity?
2. If I know I WILL have kids in the future, should I buy insurance now when I am 5-10 years younger and will be less monetary outlay? I also have a wife, do I want insurance for her too? Could I use insurance as a tool of production instead of a pure expense?
3. If I'm deferring paying tax in my 401k and paying tax now in my Roth IRA, am I wanting to be in a lower tax bracket or higher tax bracket in the future when I get those funds? Am I driving down the highway with my right foot on the pedal and my left foot on the brake.
4. If I needed the money today, how much will it cost me to take the funds out of my Qualified Retirement Accounts? Is there another alternative that offers me liquidity, control, and earning a rate of return?

The intention of my posts are to share my ideas and thoughts and not to degrade. I hope I haven't offended anyone.

And dude, caviar is gross.

[Eric Olivo]

This is a response to the 25 year old couple making $50,000 a year example. I would put the life insurance on hold until they have adequate Disability Insurance. The risk of a disability is 3 x greater than premature death. Just my thoughts.

[RME]

Aren't there guarantees in cash value policies so that a benefit is paid when you die? It seems logical to plan for this as death is pretty much a universal guarantee. If you know of a different outcome for people please let me know. thanks. Did anyone ever think that term insurance and cash value insurance serve different purposes? I'm curious as an agent has described to me buying two policies (term and cash value) so that I have one that will be there WHEN I die. Thoughts? Thank you for any help.

[T]

DISCLOSURE: I work in the financial industry.
There is no such thing as "the best thing since sliced bread" in the insurance industry. Each policy has advantages and disadvantages. Any insurance agent who sells a policy claiming it's the best thing since sliced bread is feeding you a line.
Most people should have term insurance. Try to time it with when expenses will end (mortgage paid off, kids become self-sufficient, etc).

Some will also have need for some sort of permanent insurance. Not all "permanent" policies are designed to accumulate cash value. Dave Ramsey rails against cash value policies. But there are universal life policies which are designed to simply provide death benefits with as little premium as possible. In fact, the cash value in those types of policies runs out in the relatively early years of the policy. But as long as the owner continues paying the premium, the death benefit guarantee remains in force. The disadvantage? More expensive than term. Advantages: provides for longer periods of guaranteed insurance (up to age 121) and flexibility. If the policy performs well, your premiums can decrease. If after 10 years you decide you only want the policy guaranteed to age 85, you can call the company and they'll tell you how much you'd have to pay going forward to guarantee the death benefit to that age.

Again, each policy has advantages and disadvantages. For policies designed to really accumulate cash value (other universal policies, whole life policies, and variable universal life policies), i generally recommend that people only utilize those means after maxing out their other tax-favored vehicles, such as 401k's, IRA's, and Roth's.

Dave Ramsey's view is short-sighted, in my opinion. While you can find tons of testimonies about how he motivated people to get out of debt, I have yet to find a testimony where someone said, "I bought term and invested the difference and over the last 25 years, made 12% returns on my investments and now I have plenty to live on for the rest of my life!"

The three main problems with this are 1) life never goes as planned or expected, 2) Dave's advice is for a mass general audience while life insurance planning should be tailored to the individual situation, and 3) even professional money managers don't make 12% returns year over year for 25 years in a row. The stock market over the last 100 years (thru dec 2008) performed at an ANNUALIZED (not simple annual avg) rate of 9.39% (before expenses and inflation). Mutual fund expenses (after the 5% front-end commission, have avg expenses of around 1.5% per year). Yet Dave Ramsey maintains that you can earn 12% in mutual funds while saving for retirement (EVEN AFTER ADJUSTING FOR INFLATION!!...proof see https://www.daveramsey.com/elphub/index.cfm?event=dspInvestingFaqs&intContentId=2494&mode=mutualfunds.

I have a colleague who has been financial planning for 28 years, and I have seen numerous 50, 60, and 70 year old clients come into his office and request additional permanent life insurance (and at much higher rates due to their age). Say that you're 22 and you purchase 30 yr term insurance and have your house paid off and kids out of the house by the time you're 52. what happens if you pass away between 52 and 60? your wife will receive no social security benefits until she turns 60 (and a reduced benefit at that). And social security only covers so much (and most likely less for those of us who are younger). at age 52 is she supposed to get back into the work force? what if she's been out of the work force for the last 25 years raising children?

the point is people have different needs based on circumstance. and that's not to mention all the cool estate techniques that life insurance can be used for. and what if you develop a condition and are no longer insurable but still have continuing needs? yes, you can convert term to permanent, but the insurance co's know that the only people who convert term to permanent are those who are no longer insurable (otherwise they'd buy a new permanent policy and go thru medical underwriting again).

there are certain companies who push the whole life product quite a bit (ny life and northwestern mutual, among others). it's a good policy, but many people have other saving needs besides/before accumulating funds in a life insurance policy.

by the way, if you find financial planner (someone who has their series 65 or 66 license), they should be giving you financial advice on a best-interest standard, meaning only what they feel is in your best financial interest (also known as fiduciary). most of your insurance agents fall under the suitability standard, meaning they can only sell you products that they can deem are 'suitable' for your situation. my opinion: 'suitable' is a rather relative term.

congress and the obama admin. are currently debating these two standards and whether everyone should be under a 'best-interest' standard. disclaimer: just b/c someone has a series 65 or 66 doesn't mean they will act in your best interest...they're just supposed to. and just b/c someone is under the suitability standard doesn't mean they can't act in your best interest...they just aren't required to. know who you're dealing with.

[T]

sorry, here's the link for dave quoting 12% returns adjusted for inflation: http://www.daveramsey.com/etc/cms/index.cfm?intContentID=2494#losing_money.
Adjusting for inflation, the stock market has returned 5.99% returns from 1/1/1909 to 12/31/2008 (100 yrs)...and that's before investment expenses.
Do you know what the difference between 12% and 6% is over 30 yrs? if you started with 100,000, you'd have 574,000 with 6% returns and 3 million with 12% returns. no wonder dave thinks no one should need permanent life insurance.

for the record, i like dave in almost all things debt-planning related. he's a great motivator and has helped thousands. his total money makeover book inspired me to get my master's in financial planning. but let's be clear. dave is not a financial planner. debt planning is only one of a myriad of areas that financial planning takes into account. and his background is in real estate. in fact, he pays an investment professional to do his investing.

i wish he stuck to simply debt planning matters and left the investment and insurance stuff to the professionals. but what are you gonna do? the man's gotta make a living by selling his advice/books/cd's/dvd's, right? i can't fault him for that...he's got a great business model going.

[T]

sorry, here's the link for dave quoting 12% returns adjusted for inflation: http://www.daveramsey.com/etc/cms/index.cfm?intContentID=2494#losing_money.
Adjusting for inflation, the stock market has returned 5.99% returns from 1/1/1909 to 12/31/2008 (100 yrs)...and that's before investment expenses.
Do you know what the difference between 12% and 6% is over 30 yrs? if you started with 100,000, you'd have 574,000 with 6% returns and 3 million with 12% returns. no wonder dave thinks no one should need permanent life insurance.

for the record, i like dave in almost all things debt-planning related. he's a great motivator and has helped thousands. his total money makeover book inspired me to get my master's in financial planning. but let's be clear. dave is not a financial planner. debt planning is only one of a myriad of areas that financial planning takes into account. and his background is in real estate. in fact, he pays an investment professional to do his investing.

i wish he stuck to simply debt planning matters and left the investment and insurance stuff to the professionals. but what are you gonna do? the man's gotta make a living by selling his advice/books/cd's/dvd's, right? i can't fault him for that...he's got a great business model going.

[Doug]

Here's a working link to Dave Ramsey's Investing FAQ page (without the extra period at the end as in all the links above): http://www.daveramsey.com/elp/investing-faq/

[Steve M]

When the media personalities, recommend Term/Invest the Difference they only look at the short side. Over a person's lifetime, permanent insurance with waiver of premium will out perform the investment and have a guaranteed death benefit that is growing and paid in full in 10 to 20 years, vs. T/ID which may have better cash flow in the early years, but when you factor the 2nd term insurance policy is needed the costs are astronomical, if you can get it.

My advice, never base your financial decisions on OPINION! Find a financial professional who utilizes a Macro-economic financial model and can lay out the pros and cons of every financial decision. Base your decisions on FACTS!

[esdee]

do you need the original documentation to cash in on a life insurance policy or are copies acceptable?