Why I Disagree with Dave Ramsey’s Insurance Advice (Part 1)

More than once someone has come to me, about to make a life insurance mistake because “Dave Ramsey said…”.

I admire Dave as he has done a ton of good; but regarding insurance, I have to take issue.

Here is one of Dave’s insurance commentaries which I think miss the mark.

One recent article was entitled “8 types of Insurance You Can’t Go Without”: auto, homeowner/renters, umbrella, health, long-term disability, term life, long-term care, and identity theft.  A young person with school loans and/or credit card debt needs to keep overhead low, so I hate to saddle anyone with all those premiums.  Because most people pay more into insurance than they get out of it, Larry Burkett used to say, “The cheapest form of insurance is self-insurance”, and “Don’t insure that which you can afford to pay for yourself.”  Dave promotes insurance liberally; Larry did sparingly.  I agree with Larry.

There is a very real danger to consumers to waste money on premium dollars that could be employed paying off debt and saving for future needs.  Debt free trumps well insured any day.

Dave: “You need 10–12 times your yearly income in term life insurance.  That way your income will be replaced if something happens to you.”

Mike: For those who need it most (folks with young children), Social Security Survivorship benefits are substantial. First get a good handle on how you are insured already.  Remember most pay on a term policy 20 years and throw it in the trashcan.  Using multiple-of-salary to determine amount of life insurance leads to overbuying.  Thinking through this first step more carefully saves even more than shopping for the best rate.

Dave: “What about singles with no dependents? …If you’re debt-free and have enough cash to pay for your burial, you can hold off on life insurance, but why would you? The younger you are, the more affordable term life insurance is, so there’s no reason to wait until you have a family to get insured.” [This sounds like a classic sales line.]

Mike: I recently worked with a 32-year-old new dad who had bought a 20-year level term policy eight years ago when single. Now he has an infant daughter with only 12 years left on his policy.  What he bought is not enough, he’s having to start over, so it didn’t save money but wasted it.  He should have used those premiums to pay off student loans, save for a house, or fund a Roth.  Wait till you need insurance to buy insurance.

Dave: “Whole life insurance is a rip-off!  It often costs hundreds of dollars more a month and includes a “savings” plan with a terrible return.”

Mike: I never recommend whole life, but when someone has an old cash value policy with one of the better companies, the rate of return on cash values may be quite good (4% tax-free).  Know what the cash value rate of return is before you drop it.  If favorable, consider turning it into a reduced paid-up policy and using that it as your emergency fund.  Don’t throw the baby out with the bath water.

Dave Ramsey has helped so many, but don’t blindly follow his insurance advice.  Get a second opinion.