If you are a Dave Ramsey listener, then you know that he feels strongly about term life insurance. In fact, you have probably heard Dave say, “never buy cash value insurance” and that term life is much more affordable. In this article, we will examine Dave’s recommendations concerning term life insurance. We believe the only way the vast majority of people can afford adequate life insurance coverage is by selecting a term policy or a combination of term and GUL (term to age 100).
If you would like to read about our review of Dave Ramsey regarding life insurance, then please read our Dave Ramsey Life Insurance Review here. The purpose of this article is to examine, underscore and expand on several of Dave’s points pertaining to term life insurance. We will also show where (and why) we disagree with Dave related to term life insurance.
If you are familiar with Dave Ramsey’s teachings and simply want to check out points of disagreement, then we have made it easier in this article. Just look for the Burnt Orange font.
For Instant Term Life Quotes (Including Term to Age 100) Please Use Our Quote Engine on this Page
Topics we will cover — What Dave Ramsey thinks about the following:
- How much term life insurance is appropriate?
- What term lengths are best
- What riders are important
- How to select the best term policy
- Where to shop for term life insurance
How Much Term Life Insurance Is Appropriate?
According to Dave Ramsey, the appropriate amount of life insurance to have is 10 to 12 times your annual income. We have heard this “rule of thumb” from several sources over the years and it is good advice, generally speaking. This rule of thumb will work for most people. To determine the best amount of life insurance needed, it is important to look at more than income. That is just one variable. The following variables could cause you to increase or decrease the amount needed.
Other Factors To Consider When Determining The Amount of Life Insurance Needed
- Parents or in-laws willing (and able) to help financially in the event of your death.
- Amount of debt.
- Ability (and desire) of spouse to work and earn an income in the event of your death. You or your spouse might want to cut back on hours (and income) if one of you dies when your kids are young.
- Do you want to ensure college education is funded by life insurance in the event of your death?
- Volatility or stability of projected income.
- How much coverage you “want” to have.
There are other criteria to consider, so it’s important to evaluate your situation and speak with an advisor who can help you determine the appropriate amount. Again, Dave’s advice to buy 10 to 12 times your income, may or may not be suitable for you.
Another point to mention is that the need for life insurance usually diminishes as we get older. As we age, often times our income increases and children become independent. If you were to die when your children our under the age of 5, much more money would be required (to replace your income) then if you died when your kids are between the ages of 15 and 20. Sometimes people will ladder their term insurance, so that policies expire at different times allowing a “step-down” in coverage.
Some people reduce the face amount of their policy as the need for coverage diminishes. Most carriers will allow you to reduce the face amount with a commensurate reduction in premium. Most policyholders are not aware of this option.
What Term Lengths Are Best?
Dave recommends buying a term policy that will stay in force until there is no longer a need for the life insurance. So, if you have very young children (or plan on having more kids), then a 30-year term would probably be most appropriate. The idea is to invest your money so that in 15, 20 or 30 years, you and your loved ones will no longer depend on your income.
Dave suggests erring on the side of buying a longer term period, rather than shorter. Investments might not grow at the projected rate and so it is better to be conservative. You might realize 15 years into a 20-year policy that you need coverage for another 10 or 15 years. At that point, it would be much more expensive to buy coverage based on your attained age. Also, there is a greater probability of health problems that could leader to higher rates.
Why Not Consider a Longer Term Length Such as Term to Age 100
The only point of disagreement on term length is that you should consider a guaranteed universal life (Term for Life or “Term to age 100”) policy as a small percentage of your total coverage. The same line of reasoning holds true when Dave says err on the side of purchasing a longer term period. Unexpected setbacks in investments, health and other areas could extend the need for life insurance beyond 30 years.
This is simply an option to consider, not a recommendation. It is certainly more expensive, because carriers know that over 90% of term policies either lapse or expire – and the death benefit isn’t paid. A GUL is guaranteed to pay a tax-free benefit to your beneficiaries. For this reason, GUL costs a lot more than shorter term policies.
What Riders Are Important
Dave Ramsey cautions folks against purchasing unnecessary riders (optional benefits at an additional cost). We fully agree with this advice. Sometimes the child(ren) life insurance rider makes sense, especially if you have more than 2 children. Other riders, such as Waiver of Premium (for disability) or accidental death and dismemberment can duplicate other coverage and may not be necessary.
How to Select the Best Term Policy?
Dave Ramsey’s advice on this subject is rather simple and straight forward. Dave says that all the carriers offered through Zander Insurance have good financial ratings, so it’s just a matter of shopping for the lowest cost policy. Price is probably the most important consideration with term life insurance.
We think there is another important factor (in addition to financial ratings and price). Why not buy a policy that has a decent conversion option? If there are a few A+ rated carriers with almost identical premiums, why not select the carrier with the best conversion option. Some term policies won’t allow you to convert to a permanent policy; others have limited options. Some carriers allow you to convert your term policy to any of their permanent life insurance policies, including GUL.
Conversion to permanent life insurance probably wouldn’t be necessary, but there are cases where it could be very important. If you were diagnosed with a terminal illness or a disease that would significantly reduce your life span and your term policy was due to expire in 6 to 12 months, you would want to convert to a permanent policy. It would be worth paying an additional few thousand dollars per year knowing that your beneficiaries would receive the death benefit. There are other reasons why conversion could be useful.
Where to shop for term life insurance
Dave refers people to Zander Insurance as the one and only source for getting quotes and buying life insurance. We encourage people to work with independent agents and Zander insurance is an independent agency. They work with several top rated life insurance companies. From what we can tell, the folks at Zander provide very god service. However, Zander Insurance does not offer many top-rated life insurance companies with some of the lowest rates on the market. Carriers like Ohio National, Midland National and Pacific Life – all A+ rated carriers (by AM Best) with very low rates – just to name a few.
An Example of Savings with Other Carriers that Aren’t Offered by Zander Insurance.
Let’s take a look at a male, age 41, Preferred Non-tobacco looking for a 20-year $750,000 term policy. We compared the results of Zander’s quote to our quote engines (we use three). We found that Five out the lowest Six carriers don’t show up on Zander’s quote engine that show up on our quote engines. The two lowest cost carriers are Principal Life and Ohio National. Also, in the lowest six are Pacific Life and John Hancock. All those carriers listed are A+ rated by AM Best. You will find the only carrier that shows up on Zander’s quote engine is Protective Life.
With other types of services (real estate, tax advice, financial planning), Dave refers people to Endorsed Local Providers (ELPs). These are like-minded experts who meet or exceed Dave Ramsey’s standards. We understand that Dave Rasmey likes and trusts the owner of Zander Insurance. Dave doesn’t hide the fact that Zander Insurance is a paid advertiser. The folks at Zander our probably well trained and excellent at customer service.
We feel that Dave should recommend more than just one agency. We would like to see him encourage his listeners to choose from other independent agents, aside from just Zander. Having the choice of many more carriers could mean substantial premium savings.
Dave Ramsey on Term Life – Conclusion
In conclusion, we think Dave Ramsey offers some excellent advice pertaining to term life insurance. He has probably saved countless people from buying a cash value policy that was ill-suited for their needs and provided a much lower face amount.
We would like to see Dave mention the fact that there is a permanent policy that it not designed to build cash value: guaranteed universal life insurance (aka Term for Life). This brings us to our last point…
Since Dave only recommends Zander Insurance, people will not be made aware that guaranteed universal life is an option. Also, they will not be told there are several A+ rated carriers that offer very low cost term insurance. We think Dave should, at the very least, tell his readers/listeners to shop for the best policy by checking more than one agency.