For over 15 years I have worked personally with Dave Ramsey, his listeners and team members to help them make important and informed decisions about their insurance needs and the most cost effective ways to address them. Through the years I have responded to over 10,000 of Dave’s listeners regarding their insurance questions.
This blog contains many of the most frequent questions and answers since they provide an excellent resource to Dave's specific advice on very specific insurance questions. I hope you find this information to be a valuable resource that you can refer to many times in the future as you progress along your financial path. Click on the category noted which relates to your question so that you can see the posting currently available. If you do not see your question or still have concerns please don't hesitate to use the "Question Widget" noted on this site for further information or call us toll free at (800) 356-4282.
Many people are surprised that the advice from Dave and I doesn’t always involve the purchase of insurance as the only alternative. Insurance is a key component of any family's financial plan but it can also be a drain and a detriment if the wrong plans are purchased. Implementing the plans and approaches that Dave and I recommend, most importantly, the establishment of an emergency fund, will help reduce a families overall insurance costs and allow them to focus their dollars on more important things such as getting out of debt and growing wealth.
Dave does not recommend purchasing the “waiver of premium” plans. As a percentage of cost, the benefit is over priced and serves as an add-on rider that makes the insurance company a lot of money and rarely benefits the client. A waiver of premium rider states that you do not have to pay the premium if you become disabled. However, the definition of disability is so stringent, that very few people actually qualify. In addition, term life rates are typically very low. They can be afforded through your emergency fund if you have short term income issues, and then through your long term disability if loss of income due to disability continues for a longer period.
Insurance companies typically only require that you go tobacco free for 12 months before offering a non-tobacco use rate. This is not their lowest Preferred Plus rate but still represents a strong savings off of the smoker rates. If you have not quit a full year it really depends on the time you have left to reach this accomplishment. Dave still recommends buying the longer term period, which is more expensive, but just for the one year,. It locks in your rates at a younger age and is still beneficial in the event you do not complete the entire 12 month period. If at 12 months you are tobacco free then you apply for a new non-smoker plan and benefit from the lower rates. At the three year point then you can qualify for Preferred Plus (lowest rate) assuming all other health issues are normal and a further savings can be achieved. It is simply Dave’s advice that you get what your family needs now since we can’t predict the future and then adjust as things improve. You can compare rates online at our website, or call us toll free at (800) 356-4282 for personal assistance.
Dave is not totally against Annuities but their priority in your financial plan is fairly far down the list. It really depends where you are in your “Baby Steps and Debt Snowball”. Dave frowns upon making an annuity type investment while still in debt and if you have not maxed out other investment options such as your employer retirement plan and possibly even a Roth IRA, which grows tax free. If at a point where you have paid off debt and have utilized all other more productive options, then an annuity does offer some tax deferred growth and can be part of a logical plan. There are just several other more productive steps to take first. He does prefer Variable Annuities over any others since they allow for investing in stock mutual funds with the tax preferred protection of the annuity. You may want to contact one of Dave’s Investment ELP’s to compare options to the plan you are considering. You can visit www.daveramsey.com and click on Investment ELP.
As long as some very simple rules are followed, the death benefit from a life insurance policy is always treated tax free from federal income taxes. There are a few situations where certain IRS or accounting rules, if violated, could make it a taxable event. If a business pays for a life insurance policy and deducts the cost of the policy as a business expense, which is not allowed, then the death benefit could then be taxed. Also, if the owner of the policy, the insured, and the beneficiary are three different people then the death benefit could be considered a gift and subject to tax. It is also advisable for individuals with larger estates to not be the owner of their own policies since the beneficiary may not be taxed but the value of the policy could be included in the owner’s estate tax valuation. These are infrequent situations and as mentioned the vast majority of life insurance proceeds are paid Federal and State income tax free.
There has been an increase in the amount of companies offering 7702 private plans. This is a fairly interesting development since there is nothing legally defined as a 7702 plan. The use of the term 7702 plan really doesn’t exist. It is just another “sales tactic” of agents to sell cash value plans which are inherently flawed. The 7702 plan is a marketing term used to allow an existing set of insurance products, typically Variable Life plans, to borrow some of the reputational credibility of an IRA or 401k plan. There is an IRS code 7702, however this section addresses the tax implications of life insurance contracts and does not bestow any additional benefits by naming a plan under this label. It’s just another sales gimmick and Dave’s criticism related to why Cash Value plans are poorly designed consumer products does not change in any manner due to this new “marketing approach”. The products used still have all of their inherent flaws and should be avoided.
The Suicide/Incontestability Clause is applicable on every term policy and relates to those individuals that misrepresent or lie on the application about issues that would have caused them to be declined if that information had been properly disclosed. The two year suicide clause is very simple, if a person commits suicide during the first two years policy period, the death benefit will not be paid. The company will simply return the premium that was paid to the insured’s estate and no benefits will be paid. After 2 years then there is no limitations and a death by suicide would be fully covered.
The Incontestability clause also applies during the first two years and allows an insurance company the right to verify the accuracy of the information provided during the application/underwriting process of the policy. If there were material misrepresentations regarding info that would have caused the company to decline the application, then the company has the right to deny the claim and return the premiums. Once a policy remains in force past the first two year period, the company typically has no recourse and will pay the policy benfits to the beneficiary.
All of the plans we offer are “guaranteed level” which means that the rates are guaranteed not to change for the time period you select, whether it is a 10,15,20 or 30 year period. The policy locks the company in to not changing the rates, and you only need to pay the premium for the length of time you want the coverage. If you purchase a 30 year plan but decide after 20 years you don’t need it anymore then you simply cancel the policy and no further premiums are due. The guarantees are there to protect you against companies making changes to their plans once the policy is in force.
You should ask your attorney to have a Term Life insurance plan as part of your settlement, especially if you will be reliant upon your ex-husband for support into the future. The court will create the “need” since you cannot apply for a policy without his participation in the application process. Your soon to be ex-husband will have to complete and sign the application as well as take a brief paramedical exam to determine his eligibility and cost. If there is a mandate to do this via the divorce decree, you can be assured that he will participate at this level. You will also want to make sure that you are listed as the owner of the policy so that you are the only one that can change the beneficiary designation and are notified in the event that the premium is not paid.
The answer to this question is an emphatic NO! The Insurance Industry has done an excellent job over the decades creating and reinforcing the concept that you need Life Insurance for your “Whole Life”. Hence the name of their most popular product. The reality is that you need Life Insurance for a period of time that your family cannot maintain their financial lifestyle due to a lack of savings or debt. By purchasing Term Life Insurance , with rates locked in for the time period that reflects the risk related to debt and savings, you are able to free up funds that can be used to pay down debt, establish your emergency fund and grow your savings long term. It makes little sense to overpay for a product now (Whole Life) so you can have protection in later years when through a proper financial strategy you won’t even need Life Insurance. You are paying higher interest rates on credit card and other types of debt than you receive on your cash value savings within a Whole Life plan which makes the extra expense even more difficult to make financial progress. Remember as you are attacking debt and increasing your savings you are on a path to reducing and eliminating your need for life insurance all together so in the future those funds can be used more effectively through other investment options. There is no financial justification of spending dollars on a product you no longer need just to get a certain rate of return. The expense of the insurance draws away from the true investment value you receive which is poor to begin with. In addition, since your savings and emergency fund are established any final or burial costs should be paid from these funds since buying Life Insurance for these known expenses is also a waste. Click here to learn more about the debate of “Term vs. Cash Value” plans.
There are many elements to the new federal healthcare law, known as the Patient Protection and Affordable Care Act (PPACA) and, in some cases, the final regulations have not been released yet by the Dept. of Health & Human Services. Many changes have already occurred, such as Health plans no longer having maximum lifetime benefit limits, mandatory preventative care services and the inclusion of dependent children in plans up to age 26. However, the most significant changes go into effect 1/1/14 and includes what has been called the “individual mandate”. This requires most consumers to purchase health insurance which meets a benefit standard set by the Federal Government or be subject to a penalty.
If your Employer provides Group Health Insurance benefits, it is likely that your plan will meet the mandate requirement since there are guidelines that Employers must follow that are based on benefit design and affordability or they would be subject to penalties. If your Employer does not provide Health Insurance, then you will be required to purchase a plan and provide proof of coverage to avoid penalties. Your Employer is also required, if offering a Health plan, to have the Employee contribution for single coverage not to exceed 9.5% of their wages or they could be subject to penalties.
Plan options for individuals and small businesses are still being developed but PPACA requires the establishment of Health Insurance Exchanges in each state that will provide an outlet for individuals and families who do not receive benefits from their employer. Currently there are four plans expected to be offered and these will meet the requirements of the individual mandate.
As of 1/1/2014 Insurance Companies can no longer limit, exclude or deny coverage or charge higher premiums on pre-existing health conditions so, access to a plan is not limited any longer by your health. In addition ACA establishes subsidies to help individuals and families afford this expense. The subsidies vary by income level and are intended to help those between 133%-400% of the poverty
level limit their costs to 3-9% of their adjusted gross income. The 400% level presidents a family of four earning approximately $92,000 per year.
There are several other elements of PPACA going into effect 1/1/2014 with many provisions effecting Employer plans. You can visit www.healthcare.gov for more details. We will update this posting as more information is made available.