If you’re familiar with personal finance personality, radio show host, author, and entrepreneur Dave Ramsey, you know that if he’s anything - he’s opinionated. And Dave has three firm opinions about life insurance -
- What type you should buy
- How much you need
- Where you should buy it
This article is going to look closely at all three of Dave’s opinions objectively and let you be the judge if he’s on target or not. You’ll benefit from reading this if you’re currently in the market for life insurance or will be in the future, if you already own life insurance and want to be sure you’re properly positioned, or you just want to get more familiar with Ramsey’s position on life insurance.
Let’s start at the beginning.
According to Dave Ramsey, what type of life insurance should you buy?
Spoiler alert - Dave Ramsey believes you should ALWAYS buy level term life insurance. In a minute, we’ll look at why, but let’s first look at the other types of life insurance Ramsey has examined, what they are, and why he believes they’re a poor choice.
Permanent life insurance - like term life insurance, permanent life insurance is a category of life insurance that contains different types of life insurance policies. Let’s look at those types, how they’re structured, and what Ramsey thinks of them (another spoiler - Ramsey doesn’t hate all of them).
Whole life insurance:
Whole life insurance is a type of permanent life insurance that stays in force your whole life (hence the name). Your rates won’t increase, and the policy won’t expire as long as you pay your premiums.
There are two components to whole life insurance. First, there is the life insurance death benefit. When you die, the life insurance company will pay the death benefit to your beneficiaries, minus any outstanding policy loans you may have taken out.
Second, there is the cash value component. A portion of every premium dollar you pay goes toward the cash value, which operates similar to a bank savings account. The insurer sets a guaranteed interest rate that is credited to the cash value, which helps it grow over the years. The cash value can be withdrawn (subject to penalties in the earlier years of the policy) or borrowed.
What Dave Ramsey thinks: simply put, Ramsey has called whole life insurance a “rip-off.” He believes life insurance should only provide a death benefit and not be used as a savings vehicle.
Ramsey believes everyone should save money, just not through a life insurance policy. He said he’s done the math, and you’d be better off buying a term life policy and putting the money that would have gone into a whole life policy’s cash value into a mutual fund with the potential to provide a much higher rate of return.
Universal life insurance:
Universal life insurance also has a death benefit and builds cash value. But, it differs from whole life’s fixed premium structure in that universal life insurance policies offer adjustable premiums. This means you can use some of your policy’s cash value to pay your premiums.
What Dave Ramsey thinks: Dave thinks that the fees associated with universal life are absurdly high, and the interest rate credited by the insurance company is much too low. Again, he advises readers and listeners to “buy term life and invest the difference in a mutual fund.”
Variable universal life insurance:
Variable universal life insurance is the same thing as universal life insurance, except the cash value is invested in mutual funds, which are part of the policy and have the potential to grow faster and larger than other traditional policies cash values. As the policy owner, you get to choose the mutual funds from a selection provided by the insurer.
What Dave Ramsey thinks: Ramsey thinks variable universal life is one of the worst life insurance policies you can buy because of the high management fees charged by the insurance company. He believes those fees erode the mutual fund performance and that term life and a mutual fund not tied to an insurance policy is the way to go.
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Indexed universal life insurance:
If you’ve ever invested in the stock market, you’ve probably heard of the Dow Jones Industrial Average, Nasdaq, and the S&P 500 indexes. These indexes measure how well the stock market is doing. Index mutual funds invest in companies included in these indexes.
These index funds drive the cash value growth of an indexed universal life insurance policy, similar to how other types of mutual funds affect the cash value in a variable universal life policy.
What Dave Ramsey thinks: again, Ramsey believes the fees are out of line with indexed universal life and that if you want an index fund - go by it on your own, after you buy a term life policy.
No medical exam life insurance:
Each of the permanent life insurance policies we’ve looked at requires you to have a medical exam. However, there are several types of permanent life insurance that don’t require a medical exam:
- Simplified issue life insurance: no medical exam is required, but you do have to answer questions on the application concerning your health history.
- Guaranteed issue life insurance: you don’t have to have a medical exam, and no health questions are asked. Coverage is guaranteed to be issued by the life insurer, regardless of your health condition.
What Dave Ramsey thinks: Ramsey is quite positive about these products; he likes them, particularly for people who aren’t comfortable having a medical exam and providing blood and urine samples. He also likes them for people with pre-existing health conditions that would cause them to be declined for traditional permanent and term life insurance.
Term life insurance: this category of life insurance encompasses numerous different types of term policies, including annual renewable term (ART), 10-year, 20-year, and 30-year term life insurance, decreasing term life insurance, and convertible term life insurance.
Term life insurance
Term insurance is purely life insurance with no cash value component. One hundred percent of your premium goes toward the policy’s death benefit (minus fees and commissions). Unlike whole life insurance, term life will eventually expire when the term ends unless you buy a convertible term life policy that can be converted to a permanent one.
What Dave Ramsey thinks: Ramsey loves guaranteed level term life insurance. He believes anyone who can qualify medically for life insurance should buy term and invest their money elsewhere (mutual funds, IRA, 401(k), etc.). He expounds how term life is straightforward, inexpensive, and accomplishes the only job life insurance should be designed to do - support your loved ones if you die.
Why Do Some Life Insurance Agents Disagree With Dave?
While there are many agents that agree with Dave, you’ll find a not-so-silent minority who don’t. Most agents who oppose Dave do so for a couple of reasons:
- They strongly believe in permanent insurance. Many agents, particularly those who have been in the profession for decades, were trained by large life insurance companies to sell whole life and universal life insurance, and to only sell term life insurance if necessary.
These traditionalists believe that the fixed premiums and cash value features of whole life make it a product that everyone should own, and that inexpensive term insurance which will ultimately expire worthless is no better than renting a home, rather than owning it.
- Commissions are higher on permanent insurance. Just like a few bad apples can spoil the whole bunch, a few commission-driven life insurance agents can put a bad taste in a buyer’s mouth.
Commission-driven agents avoid selling the term life insurance that Ramsey recommends because it pays them substantially less in commissions than do permanent life insurance products, like whole life, universal life, and variable universal life insurance.
For example, the sales commission for selling a $250,000 whole life insurance policy to a 50-year-old is much higher than selling that same person a term life policy with the same face amount, even though the prospect may only need the life insurance in force for five years to guarantee a loan.
It should be noted, that the vast majority of professional life insurance agents do not base their recommendations on how much they stand to gain financially and will only sell the product that best meets the client’s needs.
How much life insurance does Dave Ramsey think you need?
Dave Ramsey believes anyone buying life insurance should buy 10-12 times their annual earnings in term life. He says this amount will pay your mortgage and allow your family to remain in their home when you die, pay for your kid’s education, pay off outstanding debt, and leave enough money to pay your final expenses (funeral and burial costs).
An example he uses is Sarah:
- Sarah’s salary is $40,000 annually, and her term life policy’s death benefit is 10x that ($400,000).
- If Sarah dies while her policy is in force, her family can invest the $400,000 death benefit in a mutual fund that returns 10% annually.
- That investment could yield $40,000 per year in income - Sarah’s original salary.
Critics of this multiple of income approach argue that one size doesn’t fit all when it comes to the right amount of life insurance. Instead, they use a more detailed, analytic approach to determining how much life insurance you need, often using software to select a policy’s face amount.
Where does Dave Ramsey believe you should buy life insurance?
Ramsey believes you should buy life insurance from an independent life insurance agent or financial advisor/planner who represents multiple life insurance companies, as opposed to a “captive agent” who represents only one life insurer. He suggests that independent agents can provide you with multiple quotes to get you the best rate from a top-rated insurance company.
However, it should be noted that Ramsey does promote certain agencies from whom he receives a commission. He uses a “RamseyTrusted Shield” that he awards companies who he believes are “top-notch professionals that will serve you with absolute excellence.”
What type of life insurance is right for you?
Hopefully, this article has shed some light on your options for buying life insurance. To recap:
- Term life insurance is the least expensive type of life insurance you can buy. The money you save can be invested in mutual funds or other investments with higher growth potential than permanent insurance.
- Permanent life insurance policies don’t expire like term life policies, and the premiums won’t go up. Some people who believe they don’t have the discipline to “invest the difference” after buying term insurance prefer permanent insurance because one premium payment funds their death benefit and cash value growth.
Ultimately, everyone is different and has their own preference. If in doubt, ask your financial advisor. They can present you with all of your options, and they’ll probably tell you that your family won’t care what type of life insurance you had in force when you died - what will matter is the amount of the death benefit they receive that will help them be financially secure.
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