Orlando Harmon
Dave Ramsey, a seven-time #1 national best-selling author and personal finance expert, advises against accidental death and dismemberment (AD&D) insurance. He recommends long-term disability insurance instead, as it covers a substantial part of income lost due to injury or disability, which AD&D policies often do not. Ramsey also suggests an umbrella policy for extra liability protection at a low cost, uninsured or underinsured motorist coverage, and term life insurance of 10–12 times your income. He emphasizes that insurance should protect against financial risks and not be used as a savings plan.
| Characteristics | Values |
|---|---|
| Purpose of insurance | To transfer financial risk you can't handle to an insurance provider |
| When to buy insurance | When something bad happens that could wipe you out financially, e.g. hospital stay, house fire, getting sued after a car accident |
| When not to buy insurance | When you can handle smaller expenses yourself, e.g. routine visits to the dentist or eye doctor |
| Auto insurance | Chances are your state requires it, but you need to know which types of protection to include in your policy |
| Umbrella policy | Provides extra liability protection at a low cost, typically $200–300 annually for $1 million in coverage |
| Uninsured or underinsured motorist coverage | Protects your car if you get in an accident with an uninsured or underinsured driver and it's their fault |
| Long-term disability insurance | Covers a substantial part of income lost due to an injury or disability |
| Whole life insurance | Includes a built-in savings plan, but the fees are high and the returns are historically subpar |
| Term life insurance | Typically recommended in an amount equal to 10–12 times your income on 15 or 20-year guaranteed level term plans |
| Accidental death and dismemberment insurance | Not recommended, as most pay out only a small portion in cases of dismemberment and many won't pay a death benefit if you die from a medical procedure, health issue or drug overdose |
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What You'll Learn
- Dave Ramsey recommends against accidental death and dismemberment insurance
- Long-term disability insurance is a better alternative
- Umbrella policies are worth the investment
- Auto insurance is important, but understand what your policy includes
- Term life insurance is recommended over whole life insurance
Dave Ramsey recommends against accidental death and dismemberment insurance
Dave Ramsey, the seven-time #1 national best-selling author, personal finance expert, and host of The Ramsey Show, advises against accidental death and dismemberment (AD&D) insurance. He recommends a good level term life insurance policy, suggesting that people opt for 15- to 20-year level term life insurance with coverage separate from any provided by their employer. He emphasizes that the coverage should amount to 10 to 12 times one's yearly income. The purpose of this insurance is to replace lost income in the event of an individual's death, allowing the surviving spouse to invest the insurance money.
Ramsey argues that AD&D insurance is unnecessary and highlights the limitations of such policies. He points out that most AD&D insurance policies only pay out a small portion in cases of dismemberment, and many do not offer a death benefit if the insured dies from a medical procedure, health-related issue, or drug overdose. Instead, Ramsey suggests focusing on long-term disability insurance, which can provide coverage for a substantial part of the income lost due to an injury or disability. He cites a study indicating that 25% of today's 20-year-olds will become disabled by age 67, underscoring the importance of adequate disability insurance coverage.
Additionally, Ramsey provides recommendations for purchasing insurance wisely. He suggests buying a policy before turning 60, as the need for care is usually minimal or short-term at younger ages. He advises against purchasing plans that bundle annuities or cash value life insurance with long-term care benefits. Ramsey encourages shopping around and comparing prices and coverage options from different companies. He also emphasizes the importance of higher liability limits on home and auto policies, which can provide protection against lawsuits at a relatively low cost.
While sharing his perspective on insurance, Ramsey underscores the importance of an emergency fund. He recommends setting aside an amount equal to three to six times one's monthly income, which can eliminate the need for certain insurance programs. By doing so, individuals can concentrate their insurance expenditures on more significant financial risks. Ramsey also emphasizes the value of term life insurance, suggesting an amount equal to 10 times one's income on 15 or 20-year guaranteed level term plans from companies rated "A" or better.
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Long-term disability insurance is a better alternative
Accident insurance is a type of coverage that provides financial protection in the event of an accident, such as a car accident. While it can help cover the costs associated with accidents, it is important to consider if the additional coverage is truly necessary.
Long-term disability insurance, on the other hand, offers a more comprehensive safety net. It provides income support for an extended period, typically multiple years, if you are unable to work due to a long-term or permanent illness, injury, or accident. This type of insurance is designed to replace a portion of your income, usually 50%-60% of it, ensuring that you can maintain financial stability during challenging times.
One of the key advantages of long-term disability insurance is its applicability beyond accidents. While accidents are unexpected and unpredictable, long-term disability insurance recognizes that illnesses and injuries can also significantly impact an individual's ability to work. By focusing on the broader concept of disability, this type of insurance provides coverage for a wider range of scenarios, giving you greater peace of mind.
Additionally, long-term disability insurance can help protect your future earnings. It ensures that you have a source of income even when you are unable to work for an extended period. This financial security can be invaluable, especially if you do not have substantial savings to rely on during such difficult times.
When deciding between accident insurance and long-term disability insurance, it is essential to consider your specific needs and circumstances. However, given the comprehensive nature of long-term disability insurance, it often emerges as a more robust and versatile alternative. By safeguarding your income and providing coverage for various scenarios, it offers a more holistic approach to financial protection.
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Umbrella policies are worth the investment
Umbrella insurance is a form of personal liability coverage that safeguards you, your family, and other household members from large claims or lawsuits that exceed the limits of your homeowners, auto, or other insurance policies. For example, if you are sued and your auto insurance only covers $100,000, umbrella insurance will provide protection for any amount above that. This type of insurance is especially important if you have a high income or expect to have one in the future, as it can protect against wage garnishment or loss of assets due to unexpected events.
The cost of umbrella insurance is relatively low compared to the coverage it provides. Most policies offer $1 million in extra coverage for an annual premium of less than $300. This means that for as little as $12.50 a month, you can have peace of mind knowing that your wealth and assets are protected. Additionally, by working with an independent insurance agent, you may be able to bundle your umbrella insurance with your home or auto insurance, resulting in even greater savings.
Umbrella policies are a wise investment for anyone with a substantial net worth. They offer an extra layer of protection against unforeseen events that could threaten your financial stability. By purchasing umbrella insurance, you can ensure that your hard-earned wealth is safeguarded, providing you and your family with valuable peace of mind.
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Auto insurance is important, but understand what your policy includes
Auto insurance is crucial, but it's equally important to understand the specifics of your policy and what it includes. While auto insurance is essential and often legally required, there are various types of protection available, and it's up to you to choose the right coverage for your needs.
One type of auto insurance that is worth considering is uninsured or underinsured motorist coverage. This type of insurance protects you if you get into an accident with an uninsured or underinsured driver who is at fault. It is a valuable addition to your policy, as it provides financial protection in the event of an accident with a driver who may not have sufficient insurance coverage.
Another aspect to consider is an umbrella policy, which adds an extra layer of liability protection for you and your assets. This type of policy is particularly relevant if you have a net worth of at least $500,000. It serves as a defence against potential lawsuits and financial risks associated with accidents, even if they are minor fender benders. Umbrella policies are affordable, typically costing only $200–300 annually for $1 million in coverage.
When selecting an auto insurance policy, it's important to remember that insurance should serve as a shield against financial risks that you cannot handle on your own. It should not be used as a savings plan or investment strategy. Therefore, focus on obtaining adequate liability coverage and protecting yourself from substantial financial losses rather than smaller expenses that you can manage independently.
Additionally, consider combining your home and auto coverage with a single company, as this can often result in extra discounts and streamline your insurance arrangements. Finally, consult with independent insurance agents or brokers who are not tied to a single company, as they can provide unbiased advice and help you find the best policy for your specific needs and budget.
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Term life insurance is recommended over whole life insurance
Dave Ramsey strongly recommends term life insurance over whole life insurance. According to him, term life insurance is more affordable and straightforward. He believes that the savings from choosing term insurance can be better invested elsewhere. Term life insurance is recommended when you have people depending on your income, such as your children or spouse. The premium for term life insurance stays the same every month, and it is more affordable than whole life insurance, which can be up to 10 times more expensive. Additionally, the premium for whole life insurance can vary a lot over time.
Whole life insurance includes a built-in savings plan, but the fees are high, and the returns are historically subpar. Dave Ramsey considers it the worst insurance product available. He argues that insurance should not be used as a savings plan or investment strategy. Instead, it should serve as a shield to protect against financial risks that individuals cannot handle themselves, such as hospital stays, house fires, or lawsuits resulting from car accidents.
Term life insurance provides coverage for a specific period, typically 10 to 20 years, and is suitable for individuals who want to ensure their family's financial security during that time. On the other hand, whole life insurance provides coverage for an individual's entire life, but it lacks the benefits of term life insurance and adds complexities such as varying premiums and the mixing of investment with insurance.
Dave Ramsey suggests that individuals buy term life insurance as soon as possible because the premiums increase with age. He recommends a policy worth 10 to 12 times an individual's annual income. By purchasing term life insurance, individuals can protect their loved ones and grow their wealth simultaneously. It is a cost-effective option that allows individuals to invest the money saved from choosing a more affordable insurance plan.
In summary, Dave Ramsey strongly advocates for term life insurance over whole life insurance due to its affordability, simplicity, and ability to safeguard families' financial futures. By choosing term life insurance, individuals can protect their dependents and make wise investments with the money saved.
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Frequently asked questions
Dave Ramsey advises against accidental death and dismemberment (AD&D) insurance. He recommends long-term disability insurance instead, which covers a substantial part of the income lost due to an injury or disability. He also recommends umbrella policies, which add an extra layer of liability protection for you and your assets.
Dave Ramsey recommends term life insurance, typically an amount equal to 10–12 times your income on 15–20-year guaranteed level term plans. He advises against whole life insurance, which includes built-in savings plans with high fees and historically low returns.
Dave Ramsey suggests creating an emergency fund equal to three to six times your monthly income, which can eliminate the need for certain insurance programs. He also recommends uninsured or underinsured motorist coverage and highlights the importance of shopping around for the best plan and cost.
