We all like a quick and informative article on a subject we’re researching. If you’re in the market for term life insurance AND you have been positively influenced by Dave Ramsey’s financial advice, then keep reading. The popular article is 5 Term Life Insurance Life Mistakes to Avoid. To read the entire article, please do a search for the article and include “Ramsey and/or Zander”.
We’ll examine the article, pointing out the good and not-so-good in this much read article.
First off, the article was written by Zander, not Dave Ramsey. Zander is the exclusive agency to whom Dave refers his listeners and readers. Please check out our review of Zander Insurance here. Although we highly respect Ramsey and appreciate the work he does, we take exception to the fact that he only gives people one option to shop for life insurance. Again, our article referenced above explains this in detail.
Mistake #1 Buying Too Little to Replace Income
Let’s look at the first of the 5 mistakes to avoid. In general, we agree with this advice. Most people tend to buy too little. One point with which we take issue is this:
Always buy ten to twelve times your income in life insurance coverage.
They should avoid the word, “always”. For many people, 10 to 12 times annual income is an adequate amount. However, there are numerous situations where that “rule of thumb” is inaccurate. Let’s look at one our recent clients.
Our client – “Thomas” – is the sole provider for a family of 4. His wife is a homemaker and homeschools their kids. Thomas earns approximately $65,000 per year. If he were to die, then $750,000 would not be an adequate death benefit. His youngest child is just 14 months old and has special needs. We determined, with Thomas and his wife, that a $1.2M 20-year term would be adequate.
We didn’t just look at making sure there was adequate income replacement until the children were independent. In this case, the wife did not have the education or experience to earn much money, if needed. Also, it was likely she would be the primary caregiver for their youngest child – for a long time.
In another situation, a couple in their early 40s each earns approximately $80,000 per year. However, they have no debt (including their house) and have already saved over $1M in their 401(k)s. Their only child is 8 years old. Additionally, one of the spouse’s parents are wealthy, so there is the expectation of a sizeable inheritance. In this case, only 5 to 7 times their annual income was more than sufficient.
We just looked at two situations, however, everyone is different. This is a big decision, so it’s best to take some time to think through how much coverage is needed. You might want to check out a couple of online life insurance needs calculators: Bankrate has one here and John Hancock also has a very good calculator. They take into account several factors that you might not have considered.
Keep in mind, you can always reduce your coverage in later years. So, if your need for life insurance lessens, you can reduce the face amount – with a proportionate reduction in premium.
Mistake #2 Waiting Too Long to Get Coverage
Very good point. Rates increase as you get older. Also, there is the possibility that you will develop a health condition, such as hypertension or diabetes, that could adversely affect rates. Sometimes, we encounter folks who want to wait until they have stopped smoking for one year….or until they lose weight. They are hoping for lower rates.
We recommend buying a policy – even at a higher cost – and then replacing it if your situation improves. We’ve seen too many people wait and then things take a turn for the worse.
People tend to delay this decision. For younger couples, it is smart to buy coverage as early as possible – even when pregnant – rather than waiting until life gets busy with a newborn child.
Mistake #3 Buying for Too Short of a Term
As with the first mistake, we agree with this advice. Life has a way of throwing us curveballs! Even though we think we will be financially secure, unforeseen circumstances can get in the way.
Basically, if your kids are young (or you plan to have more) and you don’t have a lot of savings, then it can be smart to buy a 30 -year term. Even though a 20-year term might suffice, those “curveballs” can cause our plans to get off track at times. Whether it’s a health or career setback, sometimes things don’t play out as expected. The extra 10 years could give you tremendous peace of mind.
KEY POINT: 20 year term is the most popular term duration and is a smart choice for many folks. Zander recommends considering a 30 year term only if you’re planning on having more children. However, if you’re in your 20s or early to mid 30s, then a 25-year or 30-year term isn’t much more money. If you are in your late 30s, 40s or 50s then a 30 year term will more considerably more money. Check out the difference by getting comparion quotes.
Use the quote engine on this page to check out the different rates for 15, 20 and 30 year term.
One thing Dave Ramsey (and Zander Insurance) doesn’t mention is the idea of having part of your life insurance in a permanent policy. Ramsey is 100% opposed to cash-value insurance, but there is a type of permanent life insurance not designed to build cash value. We think that “Term for Life” otherwise known as guaranteed universal life can sometimes make sense as a part of your total coverage. Oftentimes, 10% to 25% of your total coverage in Term to age 100 or “Term for Life” is a good strategy.
We receive numerous calls from people in their 50s and 60s who have a need for life insurance. The reasons vary, but frequently a small permanent policy gives people peace of mind, knowing their loved ones will receive life insurance proceeds regardless of when they die.
Mistake #4 Buying Too Many Riders
This could certainly be a mistake, but it’s quite unusual to be in the top 5. If the question, “What are the top 5 mistakes people make when buying life insurance?” were asked to agents on a special Life Insurance Edition of Family Feud, then this answer would not be very popular. In fact, it likely wouldn’t make the top 20 answers!
Zander makes the point that agents often add riders to increase their compensation. Although this is possible, it’s simply hasn’t crossed our minds. Some riders can make a lot of sense, but most of them do not. As an example, if you don’t have a good disability insurance policy, then Waiver of Premium (for disability) could be a worthwhile rider to consider.
A child(ren) life insurance rider can makes sense if you have several children. For an additional $5 or $6 per month, some people like to insure all their kids and know that their children could convert the policies as an adult, without evidence of insurability. The typical face amount is $10,000 but higher amounts are often available.
There are other riders such as accidental death or chronic/critical illness that vary with each carrier and can sometimes be cost effective, depending on your situation. Most people don’t purchase riders, but it is important to evaluate your options and make an informed decision.
Mistake #5 Failing to Occasionally Review Your Life Insurance Policy
Well, we’re scratching our heads at this one. We are not sure how this mistake could be considered one of the “five mistakes people make when buying term life insurance“. Looks like the author of the article was just trying to find something for #5.
We agree – it is very important to review your life and disability insurance policies every 3 to 5 years. Life circumstances change. Positive health or lifestyle changes can cause your rates to decrease. So, yes, this is important AFTER you purchase your life policy.
Critique of Dave Ramsey and Zander Life Insurance Article – Conclusion
We might put together our own list of top 5 mistakes. If we do, we would certainly include the following point.
Not shopping with an experienced agent who has at least 10 years experience and works with a minimum of 30 carriers. This can make a huge difference in the premium you pay!
If you work with a mega agency, you will typically choose from just 10 to 12 carriers and limit your options.
Another point we would also include as a “top 5” mistake is as follows:
Settling for an unfavorable offer from the life insurance company.
Too many people apply for the Preferred or Preferred Best rate classification only to find out they don’t quite qualify. The agent or agency takes the easy route and says, “Sorry, this is the best we can do.” Find out why you didn’t qualify for the expected rate and ask for a reconsideration. Also ask if other carriers will offer a better rate. A good agent will advocate for you and work towards finding you the lowest rate possible.
Overall, we think the first 3 mistakes listed in the Zander Insurance article our excellent. However, we would replace the final two points with the ones above.
We are available for advice or a second opinion, so please call us anytime for a free consultation or quote.
