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.
These plans are sometimes referred to as Hybrid policies which are based on buying a cash value life insurance plan and also a rider that allows the cash value of the policy to be used for Long Term Care expenses. Conceptually and from a sales perspective these hybrid plans seem to make sense, but when you look more closely there are serious flaws. First and foremost, the life insurance plan that these additional coverage’s are coupled with are cash value type policies such as Whole or Universal Life. Dave is adamantly against these types of plans and coupling them with a LTC benefit does not increase their appeal. Additionally, in most cases, the added benefits are inferior to those plans you could purchase directly for this risk. Many of the LTC benefits in a hybrid plan are limited as to either the amount of benefit paid, the types of services covered or the length of benefit period.
Dave recommends life insurance while you have debt that your estate can not pay if you were to die prematurely and/or you have dependents that are reliant upon you for their financial lifestyle. This is different for the need for LTC plans and the timing of when you should be considering these plans are different. As you are reducing your need for life insurance through eliminating debt and growing your savings you are actually increasing your need for LTC since you want to protect those assets to maintain the financial lifestyle of both spouses. You also typically have to maintain both plans and incur expenses for both coverage’s to keep the one that may end up being more important.
All federal employees who fall under FERS, (almost all federal and VA employees) regardless of the agency, are provided with disability retirement benefits through the FERS program. You can review information on this program by visiting the FERS website. The plan provides 60% income replacement during the first 12 months that benefits are paid, and 40% for each year thereafter until reaching early retirement age, at which point the FERS pension would begin to pay. Most insurance carriers base their offering on a 40% group insurance factor. However, there are some carriers that stop offering coverage once a federal employee has more than 10 years of service, or reaches age 50 or 55.
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.