If you’re like me, you enjoy listening to Dave Ramsey give his no-nonsense advice on his radio show. He is quick to zero-in on the real issue and help people make smart decisions with their money.
In this article, we will examine Dave Ramsey’s advice to a listener who called in with life insurance questions. The caller wanted to know what type of term policy would be best to purchase. More specifically, he asked about the proper term length (duration). We will look at Ramsey’s advice about this question and a couple of related topics.
10, 15, 20 or 30-year term – Which one is best?
This caller didn’t provide lots of details, other than he was still on Baby Step 2 (eliminating debt) and that his business was now booming. He also shared that he was woefully underinsured as the sole breadwinner for his family. Ramsey said that the age of his children could help determine the right term period.
Yes, one of the most important things to look at is how long family members will be dependent on your income. If your youngest child is 5 years old (and you don’t plan on having more), then a 20-year term should suffice. The idea (and hope) is that at age 25, your youngest child will be independent and no longer look to you for financial support.
Some families with young children opt for a 30-year term. They err on the side of caution and choose a policy that may extend a few years longer than needed. Another approach isn’t based strictly on need, but the desire to provide some permanent insurance – something we call term to age 100 or Guaranteed Universal Life. This type of policy provides permanent life insurance, but with no cash value.
Others will split up their term policies so that their coverage decreases as their need for life insurance diminishes. Sometime, laddering term policies can makes sense. We cover this strategy in detail here.
25 year term?
Ramsey didn’t mention 25-year term; in fact, it’s a term length that is rarely quoted. Up until recently, there weren’t any carriers that offered a 25-year term policy. However, there are now several carriers that offer this option. One carrier – American General / AIG – allows you to select any duration between 15 and 30 years. They call it “Select-A-Term”.
When does a 25 year term policy make sense?
Let’s say your youngest is 2 years-old and you’re not confident that a 20-year term is long enough. A 25-year term might provide that extra assurance you need. Keep in mind, that you can cancel your policy at any time. Also, most carriers allow you to reduce the face amount with a commensurate premium reduction.
How Does Your Health Affect Your Decision on What Term Duration to Select?
Dave asked about the caller about his health and said that he should consider buying a shorter-term policy if he was in good health.
Ramsey feels that people in excellent health should buy a shorter term duration because they would likely qualify for better rates in the next three to five years. We disagree with this advice because it could easily backfire. If you are 36 years-old and in excellent health today, there is no guarantee your health will remain the same. So, if you think you should get a 20-year term, but take Dave’s advice and get a 10 or 15 year term, then you might be stuck. If your health takes a turn for the worse, then you might not qualify for the best rates at a later day when you apply again.
You could actually be declined if you were diagnosed with a serious condition. That’s what life insurance is about – protecting you and your family from unforeseen events. It is an inadvisable risk. Why jeopardize needed life insurance for the possibility of qualifying for slightly lower rates.
Dave Ramsey’s Advice on Choosing a Term Life Policy – Shopping every few years
What we like about Ramsey’s advice is that it encourages people to shop for better rates, especially during the first several years after they purchase a policy. You don’t want to put your policy on “auto-pilot” and assume you can’t do better. As people live longer and mortality tables improve, the rates will continue to decrease. That’s good news.
Let’s take the 36 year-old in excellent health. Rates are coming down so much that in three years he could probably buy another 20 year term and the rates might be lower. Ramsey said that he took this approach when he was younger. The problem here is that this strategy works for someone in their 20’s or 30’s. Once your reach your early to mid-40s, premiums increase at a higher rate each year. So, the increasing premiums due to age would offset any saving due to overall rate decreases.
If you qualify for lower rates, great! Then, instead of buying another 20-year term, you could buy a 15-year term and save even more. Let’s say the premium is the same. Then you could replace your current 20-year term and you would have coverage for three more years.
When Does it Make Sense to Shop to Replace Your Current Coverage
The people who are most likely to save are the following:
- People in their 20s and 30s (sometimes early 40s)
- If you choose a shorter term period: 10 or 15 years. Once you reach your mid-40s, it’s unlikely you can shop or do better since
- Health improves. If your health has improved (perhaps you stopped taking medication for a condition), then you might qualify for a better underwriting classification with lower rates
- Stop smoking (using tobacco) or lose weight.
- You weren’t certain your agent shopped the market for the absolute best – lowest – rates.
For the most part, we agree with Ramsey’s advice on determining the best term policy. After deciding on face amount, then selecting the proper term duration is the next step. In our experience, most people buy too little life insurance and for too short of a duration. It’s much better to err on the side of caution rather than face very steep rates when shopping later in life.
Shopping every few years makes sense. An experienced, independent agent can help you with this. Make sure your agent represents at least 30 carriers and is willing to take plenty of time with you. You might not know the right questions to ask, but a knowledgeable agent does.
For advice or customized quotes (using our three quote engines), please call 678-236-1600.