Haris Ashley
Dave Ramsey, the financial advisor and author of seven best-selling books, has strong opinions on life insurance. He believes that life insurance is only necessary when you have dependents, and that term life insurance is the best option for most people. He advises against whole life insurance, which he considers a rip-off with poor returns. However, some people disagree with his views on whole life insurance, arguing that it can be a good investment under certain circumstances. In any case, it's important to carefully consider your own financial situation before deciding whether to cancel your life insurance policy.
| Characteristics | Values |
|---|---|
| When to get life insurance | When you have people depending on your income |
| How much life insurance to get | 10–12 times your annual income |
| Type of life insurance | Term life insurance |
| How long to keep life insurance | 10–20 years |
| When to cancel life insurance | When you no longer have people depending on your income or when you have enough money saved and invested to be "self-insured" |
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What You'll Learn
Dave Ramsey's teachings on life insurance
Dave Ramsey, host of the radio show *The Dave Ramsey Show,* is a well-known personal finance expert and author. He has strong opinions on life insurance, which he is passionate about teaching to others.
According to Ramsey, the sole purpose of life insurance is to replace your income if you die. He believes that you only need life insurance while you have people depending on your income, such as children or a spouse. Therefore, he recommends buying a 10-20 year term policy worth 10-12 times your annual income. Term life insurance is the most affordable option, and it ends when you no longer need it. Additionally, the premium stays the same every month, and if anything happens to you during the term, your dependents will receive a payout.
Ramsey strongly advises against whole life insurance, which he considers a rip-off with terrible returns. Whole life insurance policies are permanent and can last the policyholder's entire life as long as premiums are paid. While these policies build cash value over time, Ramsey argues that the fees are too high, and the potential returns are disappointing. He believes that insurance agents push these policies because they make more money off of them, not because they are in the customer's best interest.
Ramsey suggests that becoming "self-insured" is a better option than whole life insurance. This means having enough money saved and invested to cover anything an insurance company would typically pay for. He estimates that most people can become self-insured in 15 to 20 years.
In summary, Dave Ramsey's teachings on life insurance emphasize the importance of term life insurance to protect your dependents in the short term. He discourages whole life insurance due to its high costs and disappointing returns, recommending instead that individuals aim to become self-insured in the long run.
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Whole life insurance vs term life insurance
According to Dave Ramsey, the only purpose of life insurance is to replace your income if you die, and you only need it while you still have people depending on that income. He recommends a 10-20 year term policy worth 10-12 times your annual income. He also believes that term life insurance is the most affordable option and that permanent life insurance is a rip-off with a terrible return.
Now, let's delve into the differences between whole life insurance and term life insurance. Whole life insurance is a type of permanent life insurance that provides coverage for the entirety of the policyholder's life as long as the premiums are paid. The premium is locked in and remains the same throughout the course of the policy. Whole life insurance also has a cash value component that grows over time, which can be borrowed against or left to heirs. However, it tends to have higher premiums than term life insurance.
On the other hand, term life insurance provides coverage for a specific term or period, generally up to 30 years. It is more affordable and customizable, allowing individuals to choose a term that aligns with their unique situation. However, if the policyholder outlives the term, the coverage ends, and there is no payout or accumulation of cash value.
When deciding between whole life and term life insurance, it is essential to consider your financial goals, the desired length of coverage, cost, and the need for a cash value component. Whole life insurance may be suitable for those seeking lifelong coverage and willing to pay higher premiums, while term life insurance is a more affordable option for those who only need coverage for a specific period.
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When to cancel whole life insurance
Dave Ramsey is a well-known financial advisor with several best-selling books, a radio show, and a large online following. He is often sought for advice on life insurance and has strong opinions on the topic.
According to Ramsey, the only purpose of life insurance is to replace your income if you die, and it is only necessary when you have people depending on your income, such as children or a spouse. He recommends term life insurance, which provides coverage for a specific term, generally up to 30 years, and suggests buying a policy worth 10-12 times your annual income. Term life insurance is affordable, and the premium stays the same every month, making it a good option for those seeking short-term financial protection for their loved ones.
In contrast, Ramsey has a strong dislike for whole life insurance, which is a type of permanent life insurance. Whole life insurance policies are sold as financial products that provide a death benefit and guarantee a return on investment. The longer the policyholder pays premiums, the more cash value accumulates, which can be borrowed against or left to heirs. However, Ramsey and his followers argue that whole life insurance has several flaws. They believe that the fees and premiums are too high, resulting in poor returns, and that insurance agents push these policies because they earn high commissions.
If you have a whole life insurance policy and are considering cancelling it, be aware that you may incur surrender charges and receive less cash value than expected. It is essential to have another form of insurance or sufficient savings in place before cancelling any life insurance policy to ensure you and your loved ones remain financially protected.
In summary, Dave Ramsey recommends term life insurance for individuals seeking short-term financial protection for their dependents. He advises against whole life insurance due to its high costs and poor returns. If you are thinking of cancelling your whole life insurance, ensure you have alternative financial protection in place, such as sufficient savings or another form of insurance.
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How to calculate how much term life insurance you need
According to Dave Ramsey, the only purpose of life insurance is to replace your income if you die. Therefore, he recommends getting a term life insurance policy worth 10-12 times your annual income. This policy should be in place for the period that you are raising children or have people depending on your income, usually 10-20 years.
To calculate how much term life insurance you need, you can use a calculator provided by Ramsey Solutions. This calculator will take into account factors such as your marital status, dependents, income, debt, and retirement savings. Alternatively, you can calculate the amount of coverage you need by hand. This involves multiplying your income by 10-12. If you are married and one of you is a stay-at-home parent, you should add $250,000-$400,000 to this amount.
It is important to note that term life insurance is significantly more affordable than whole life insurance, which Ramsey and other financial advisors criticise for its high fees and poor returns. With term life insurance, you can lock in a low premium that stays the same for the duration of the policy. This allows you to invest the money you save compared to a whole life insurance policy.
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Dave Ramsey's Baby Steps
- Save $1,000 for your starter emergency fund: This initial fund will cover unexpected life events, helping you to avoid digging a deeper hole while trying to work your way out of debt.
- Pay off all debt (except the house): List all your debts except for your mortgage, and put them in order from smallest to largest balance. Then, use the debt snowball method to pay them off.
- Save 3–6 months' worth of expenses in a fully funded emergency fund: This step is about building up your savings so that you can handle bigger problems, such as job loss. The idea is to save enough to cover 3–6 months' worth of expenses, depending on your household income.
- Invest 15% of your household income in retirement: Start by looking into your employer's 401(k) and investing up to the match. Then, open a Roth IRA and max out your contributions. If you still haven't reached 15% of your income, go back to your 401(k) and contribute the rest.
- Save for your children's college fund: This step is about ensuring your children's future by saving for their education.
- Pay off your home early: This is the step that will give you complete freedom from debt. By putting extra money towards your mortgage, you can save yourself tens or even hundreds of thousands of dollars in interest.
- Build wealth and give: This final step is about living generously, leaving an inheritance, and building wealth.
In addition to these Baby Steps, Dave Ramsey also offers advice on life insurance. He recommends term life insurance, which is a more affordable option that provides coverage for a specific term, generally up to 30 years. He suggests buying a 10–20-year term policy worth 10–12 times your annual income. Ramsey emphasizes that life insurance is only necessary while you have dependents, and that it should be viewed as a short-term solution rather than a long-term investment.
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Frequently asked questions
Dave Ramsey says that life insurance is only necessary while you have people depending on your income. He recommends a 10-20 year term policy worth 10-12 times your annual income.
Dave Ramsey recommends term life insurance, which is more affordable and ends when you no longer need it. He is against whole life insurance, believing it to be a rip-off with poor returns.
Dave Ramsey suggests that you can cancel your life insurance when you have enough money saved and invested to become "self-insured". This usually takes 15-20 years.
Dave Ramsey advises getting a term life insurance policy in place before cancelling your whole life policy. This ensures you still have coverage at a lower cost.
Term life insurance is less expensive and provides coverage for a specific term, usually up to 30 years. It is a straightforward way to replace your income in the event of your death, without the high fees associated with whole life insurance.
