Dave Ramsey covers insurance, which is a very delicate financial matter from dental insurance to Christian health insurance to life insurance. As such, it’s not strange that people are beginning to ask passionate questions about how to save on insurance-related expenses.
To guide your decision, you need to consider the opinion of a noteworthy financial guru like Dave Ramsey.
In this article, we’ll be extensively discussing Dave Ramsey’s opinion on Term Life Insurance and Whole Life Insurance. We’ll also help you have full knowledge of what these entail so that you can make better-educated decisions.
What is Life Insurance and What Does Dave Ramsey Think About It?
Dave Ramsey defines life insurance as an agreement that’s made between an insurance buyer and the provider that the buyer will make monthly payment while the provider with pay the relations of the insurance buyer a specific amount when he/she dies.
While Dave Ramsey acknowledges that it’s not a topic that spurs interest in crowds due to the thought of death. He explains that insurance buyers should focus on the fact that it’ll be a huge benefit to their loved ones—as it’s a great thing for them to be financially secure on your demise.
Life insurance offers a great way to make provision for funeral expenses, debt payment, income loss, and other expenses your loved one may need to pay for after your demise. After signing as agreed, Dave Ramsey explains that you just purchased peace of mind for yourself and your families after you’ve passed away.
Dave Ramsey suggests that you should be acquainted with the common Life Insurance terminologies to have an apt understanding of the terms and agreement. Here are some common terminologies to acquaint yourself with:
- Policyholder—this is the person that’s insured (the one that owns the policy). You could also purchase the policy for another individual.
- Policy—this is the contract that exists between the policyholder and the insurance company.
- Beneficiaries—these are the individuals that are going to receive the insurance policies. The insurance company will only give the benefits to the individuals penned down to receive them.
- Death benefit—this is the money given to the beneficiary when the policyholder dies.
What is Term Life Insurance and Whole Life Insurance?
Now that you know Dave Ramsey’s view on Life insurance, you’ll have to make a choice of opting for a suitable type of Life Insurance. Quite often, the two options that’ll be laid bare before you are Whole Life Insurance and Term Life Insurance.
But what is Dave Ramsey’s opinion on these two options?
Whole Life Insurance
As the name depicts, Dave Ramsey defines whole life insurance as one that lasts for your entire life. Insurance companies usually demand more premium payment for Whole Life Insurance compared to Term life insurance. Dave Ramsey explains that a major reason for that is because while life insurance also doubles as an investment portfolio. Policyholders automatically get insurance and a savings account in one package. However, Dave Ramsey advises that policyholders shouldn’t consider it as an investment vehicle but only a means to secure the future.
Term Life Insurance
Term Life insurance is one that provides cover for a specified period. For example, if you opt for a 20-year policy, then the insurance will only cover you for the next 20-years of your life; thus the name “term.”
In an instance where either you or your wife dies within the 20-year period that the insurance covers you, the payout will be given to your beneficiaries.
To make things clearer, let’s assume that you purchased a $500,000 policy with a term duration of 20 years, your beneficiary will be paid $500,000 if you die before that 20 years expires. It’s as simple as it sounds.
What Does Dave Ramsey Think About Term Life Insurance?
When it comes to Life Insurance, Dave Ramsey always chooses Term Life Insurance over Whole Life Insurance. He believes that Term Life Insurance is a necessity for anyone that have loved ones depending on them. He reiterates that it should be an intrinsic part of everyone’s financial game plan, as it provides security in a very affordable way.
Dave believes that Term Life Insurance should be about 10-12 times your annual income. And he noted that if you invest the money appropriately, the return on that investment can make your family live a comfortable life. He believes that a 20-year policy is ideal for most people.
Pros and Cons of Term Life Insurance
Term Life Insurance has some noteworthy pros that might interest you, here are some of them:
1. Pro: They are easy to buy
There’s no simple rocket science to purchasing a term insurance policy. The term is very easy, and it’s highly recommended if you reside in a location with a low life expectancy.
2. Pro: Can be easily understood
This is one of the simplest life insurance policies to purchase as the terms are usually pretty straightforward. The only thing most insurance providers will require is that you provide some personal information. When the insurance provider receives your information, they’ll then determine your monthly insurance payment according to your age, habits, illness, work, etc. The benefits will be issued to the nominee in the advent of the demise of the policyholder within the stipulated term.
3. Pro: term life insurance can be cost-effective
When you compare term insurance to other types of insurance, you’ll notice that it’s cost-effective. This is exactly why Dave Ramsey considers it as a cost-effective way to protect the future of your family in a pocket-friendly way.
4. Pro: It helps you to save on taxes
Apart from helping to protect the future of those you care about, it’s also an effective way to cut tax payments. Your loved ones will also get tax exemption on the death benefits they get from the insurer.
After elucidating on the Pros of Term Life Insurance, let’s shed some light on its cons. Here are some of its cons:
1. Con: No Maturity Benefit
A good majority of term insurance plans don’t give policyholders maturity benefits. It’s possible that you find an insurance company that’ll extend this opportunity to you, but the probability is so low that it’s something you shouldn’t bank on.
2. Con: Little Motivation
A good majority of people stop paying their insurance premiums halfway as they consider it a waste of money. Since the payer is not going to benefit from paying the premiums, he/she has little motivation to keep paying.
What Does Dave Think about Whole Life Insurance?
Dave Ramsey has always been vocal about his distaste for Whole Term Insurance. In one of his Facebook posts on life insurance, he started by saying “Don’t waste your money on whole life insurance.” This reflects how he truly feels about the concept of Whole Life Insurance.
From his YouTube video titled “Why Whole Life Insurance is A Rip Off,” he noted that this type of Life Insurance is one you can never benefit from. In most instances, he noted that the policyholder is paying far more than his beneficiaries can get from the insurance.
Pros and Cons of Whole Life Insurance
1. Pro: Protection is not time-bound
Unlike Term Life Insurance that’s time-bound, Whole Life Insurance has no time limit. You’re at the liberty of allowing the policy to expire by refusing to pay your premiums, or you can keep paying till you’ve passed away and can no longer meet up with required payments. Regardless of what age you die, the whole life policy will definitely pay the agreed sum.
2. Pro: The Premiums are predictable
Unlike term insurance that can be somewhat unpredictable, your premium will remain constant irrespective of your health status and age.
3. Pro: It’s an asset
As you start paying your premium, you will gradually begin to increase your cash value as time goes. Depending on the agreement in your policy plan, you may be able to access the premium at a certain age and include it in your retirement earning.
4. Pro: You may get dividends
Insurance companies expect the cash value of your insurance payments to grow at a certain rate. In an instance where the cash value grows faster than expected, the insurance company will pay your dividends. Some insurance companies are known to have paid at least one annually for the past decade. The insurance you’re getting can be reinvested into paying premiums or used to cover your expenses.
1. Con: It’s more expensive than Term Life Insurance
Due to the fact that the policy doesn’t expire and it builds cash value, Whole Life Policy is usually way more expensive than Term Life Insurance. Due to this demerit, some people usually combine term insurance with Whole Life insurance to get a robust payment for their beneficiaries.
2. Con It’s way more complex than Term Life Insurance
While Term Life insurance is quite easy to understand, Whole Life Insurance on the other hand has a lot to consider, and that makes it complex. How dividends are paid can be pretty confusing, and the rate of guaranteed cash value growth may differ based on numerous considerations.
Which Insurance Does Dave Recommend?
Dave Ramsey is very vocal about his preference for Term Life Insurance. If you’ve spent up to 5 minutes listening to Dave Ramsey speak on Life Insurance, you will hear him speak favorably on the advantages of Term Life Insurance. Dave Ramsey recommends purchasing a term life insurance that’s worth about 10-12 times what your income per annum is. This way, your income can be replaced in an instance where something bad happens. Dave reiterated that this is the cheapest means of protecting your family financially in the long term.