Dave Ramsey is well known for his debt reduction and budgeting strategies. What many folks don’t realize is that Dave is a strong proponent of protecting your income through disability insurance. Disability insurance is often overlooked, but Dave Ramsey makes sure you clearly see the importance of this coverage. Disability insurance protects your most valuable asset – your ability to earn an income.
In this article, we will look at what Dave has to say about disability insurance. For the most part, we agree with Dave’s recommendations. In fact, Dave Ramsey does an excellent job covering the “Do’s and Don’ts” of disability insurance. He understands this is the “forgotten” insurance and provides plenty of statistics showing the need for this valuable coverage.
Dave also provides some good tips when considering a disability policy. However, we want to stress one area where we disagree with Dave Ramsey. We feel this area is very important and could save people a lot of money and hassle down the road. Our point of disagreement is towards the bottom of this page.
We are focusing specifically on disability insurance in this article. However, if you would like to read our review of Dave Ramsey’s views on life insurance, please click here.
Dave Ramsey’s Reasons Why Disability Insurance is So Important
The following statistics were taken from the Social Security Fact Sheet 2015 and the Disability Can Happen site (cited below). These stats are similar to the ones on Dave’s site.
- Approximately 50% of all mortgage foreclosures are due to a disability of the primary breadwinner
- Over 1 in 4 of today’s 20 year olds will become disabled before reaching the age of 67
- The average long-term disability lasts approximately 2.5 years.
- For a breakdown of these statistics and other information related to disability insurance, please visit this site: http://www.disabilitycanhappen.org/docs/Disability_Stats.pdf
In addition to citing some well-known industry stats, Dave makes a strong, compelling case for carrying adequate disability insurance. Some people think they can rely on the government or Workers’ Compensation in the event of a disability. Dave dispels this myth, explaining that the percentage of people qualifying for Social Security benefits is very low – approximately 38% of applicants qualify.
- The average monthly benefit for those who do qualify through Social Security is $1028.17 (as of July 2016).
- Approximately 10% of all disabilities occur on the job, so Workers’ Comp only helps on a limited basis. Clearly, there is a need for disability insurance.
For other up-to-date stats on Social Security Disability, please go to https://www.ssa.gov/policy/docs/quickfacts/stat_snapshot/
Disability Insurance Through Your Employer
Many people have disability insurance available to them through their employer. If this is the case, then Dave wisely recommends taking advantage of it. The premium for group disability plans is usually lower than personal plans.
Although the type of disability coverage may vary (some plans have weaker contracts than others), it is almost always a good idea to buy disability insurance through your employer, if offered.
However, there are two caveats when buying coverage through your employer:
- The policy is usually paid for on a pre-tax basis, so the benefit is taxable. The policy will replace between 60% to 65% of your income, and then the benefit is taxable. That leaves a big gap, taking you down to roughly 40% of your income. You can fill that gap with a supplemental (individual) policy.
- You don’t own your employer-based long-term disability (LTD) policy. If you are in a volatile industry or think you might branch out on your own at some point, it can make sense to buy a small individual policy.
What To Look For In A Good Individual Disability Insurance Policy
If you are self-employed or your employer doesn’t offer LTD, then Dave Ramsey provides some very good advice on what type of disability insurance policy to buy. Below are some bullet points on what to consider.
- Stay away from short-term disability policies (usually the max benefit period is 2 years). These policies are comparatively expensive because of the short elimination (waiting) periods. The contracts tend to be weaker.
- Build up your emergency fund (Baby Steps 1 and 3) and opt for a plan with a longer elimination period (3 to 6 months). This results in lower premium.
- Be careful about the definition of disability used by the insurance company. Some carriers will say your disabled (and eligible for benefits) if you can’t perform the substantial and material duties of ANY occupation. That’s a weak definition and the one used by Social Security. We expand on this below.
The items below are of utmost importance when evaluating disability insurance policies.
The following points are not very clear on Dave Ramsey’s website, so we feel it’s necessary to cover these in more depth. You are much better off working with an expert to help you compare policies and make the right decision. This is not term life insurance.
YOUR Occupation or ANY Occupation
- Look for policies that define a disability as the inability to perform YOUR occupation. There are modified definitions that fall between ANY occ and Your occ. This is very important to evaluate. Some contracts with modified definitions provide excellent value, depending on your occupation.
Non-cancellable or Guaranteed Renewable
- Evaluate whether the policy is Non-Cancellable or Guaranteed Renewable. These terms are misnomers, so let us explain. A Non-Cancellable contract means the carrier can never increase the premium. A Guaranteed Renewable contract means the carrier can increase the premium, but only for a total block of business. They can’t single anyone out for a rate increase based on their health. Contrary to what some experts say, there are carriers that offer Guaranteed Renewable (GR) contracts with much lower premium. It’s important to look at the carriers financial stability and history of rate increases if considering a GR contract.
Where We Strongly Disagree With Dave Ramsey on Disability Insurance: Where to Get Quotes
As we mentioned above, disability insurance is not like term life insurance. Disability insurance is more complex and it is very important to work with a knowledgeable, experienced agent. Equally important is working with an independent agent who works with several of the best companies.
This is where we take issue with Dave Ramsey’s recommendation to only work with Zander Insurance. Zander only works with one company – Assurity Life. Assurity is a decent carrier. They are rated A- by AM Best. The problem we have is that you really need to get quotes with at least three or more companies and compare the items we discussed above.
We write about Dave Ramsey’s relationship with Zander Insurance in our article here. However, our focus was on term life and the limited number of carriers offered by Zander. There are fewer companies that offer disability insurance, but we think that independent agents should have several to offer.
Some carriers are purposely competitive in certain niches based mostly on occupation. We offer the following top notch companies, including Assurity Life:
- Mass Mutual
- The Standard Life
- Met Life
- Principal Life
- Ohio National
- Illinois Mutual
- Mutual of Omaha
- Assurity Life
Dave Ramsey and Disability Insurance – Conclusion
We admire Dave’s strong support for disability insurance. This type of coverage is not widely promoted because there is less demand than life insurance and it requires more education and effort by agents. Some people overlook this important coverage and Dave does a great job of clearing up misconceptions and providing factual data to underscore the need.
We’re not sure why Dave Ramsey only refers people to Zander Insurance for disability insurance, but we feel it is a disservice to his listeners. Purchasing a policy with inferior benefits could lead to a huge financial loss at claim time. Additionally, you could find a company or two that offers similar benefits at a much lower cost. Disability insurance is not cheap, so we understand the importance of shopping and getting the best value possible.
We will be happy to provide customized quotes and advice on disability insurance, so please contact us for a free consultation.