Dave Ramsey begins the class on insurance with a lurid expose, interviews of evil salesmen who sold whole life insurance until they repented and sold term. As they say in the business, “Sell whole life? Don’t sleep. Sell term? Don’t eat.” After that brief episode of tabloid TV, Dave gets down to the serious business of explaining necessary insurance coverage for life in an uncertain world.
He defines insurance as money spent to transfer risk. How much to pay for how much coverage are, of course, the real problem. As Dave observes during his rant against whole life, the largest most expensive buildings in most cities are owned by banks and insurance companies. This should tell you something about their understanding of the real cost of risk.
Dave jams homeowner or renter’s insurance into the same pot with auto insurance. This is sensible, since these coverages are often sold by the same provider and are interlinked with umbrella liability coverage. Dave goes through some simple calculations to help you determine the amount of collision (if any) insurance you should carry and what deductible for your own automobile makes sense. Often, as Dave points out, a fully funded emergency fund can allow a higher deductible, but the cost savings might prove to be trivial. How much liability should you carry? That depends on where you live and who you are. Dave Ramsey carries a whole lot of liability insurance since the entire world knows he is rich. The city of Washington D.C. has more attorneys than the entire Empire of Japan (really!). Don’t visit this city without plenty of liability insurance. Rural Montana might not be as dangerous to your pocketbook.
Health insurance is a really scary problem for many Americans. If health insurance is not provided by your employer, buying your own coverage is expensive and often inadequate. Dave Ramsey recommends buying a policy with a very high (in the multiple thousands) deductible and to then cover that well defined portion of your expenses with your emergency fund. However, make certain there is no cap on total coverage. The logic is that your emergency fund can handle $6,000 or more over the course of a year but complex heart surgery or cancer treatment can quickly run into multiples of $100,000. This is what insurance is really for, transferring unlikely but possible risks that you cannot possibly handle by yourself. Dave also recommends the use of a tax deferred health savings account in combination with a high deductible if you are eligible for such coverage.
Dave Ramsey believes disability insurance is a must have, especially for young families. He recommends policies that cover you if you cannot perform in your own occupation, called own occ insurance. Look for coverage in the 65% range. This money is not subject to income tax. Therefore, 65% of your gross tax free will look a lot like your normal salary. Don’t buy any policy that covers less than 5 years of your income. The elimination period is the period of time between the start of disability and the beginning of the payments, the longer the elimination period, the lower the premium. Remember that six month emergency fund? This is an example of why it is so very important. When I was young, I worked in moderately dangerous factories. People really suffered from disabling accidents and physical conditions caused by sensitivity to dangerous chemicals. At that time, I investigated disability coverage. It was priced way out of my league. Since then it has become more common and affordable. Some companies even offer it as part of their benefit package.
Dave Ramsey recommends long term care insurance (LTCI), sometimes called nursing home insurance, for those of us over 60. Since I am 60, I am investigating the cost and benefits of LTCI. It is scary expensive. I am seeing recommended numbers like $300,000 indexed to inflation. I am pretty comfortable compared to many folks my age. I think I could carry $100,000 of coverage for my wife and myself into retirement, but that is probably not enough. I am considering self insurance by placing $100,000 in mutual funds behind a sign that reads, “In case of emergency, break glass.” If I have the discipline, I will most likely have a much larger amount of money when it is most likely to be needed in 25 years.
Dave recommends identity theft insurance that provides support services to help you repair the damage to reputation and credit rating, not the useless stuff sold by credit report services and credit card companies. This is really pretty inexpensive and can often be purchased as a rider to your homeowners insurance. Look into it, if you don’t have it.
Finally, Dave covers what is obviously one of his favorite subjects, life insurance. Evidently this topic generates tons of hate mail from offended insurance salesmen. Dave is instantly and correctly suspicious of any financial product that combines savings or an investment vehicle inside an insurance product. If someone tries to sell you any such garbage, run away and hide. What he does recommend for families with minor children is term insurance to the tune of 10X salary. The logic is that if the husband or working wife dies 10 times their salary can be invested in mutual funds that can realistically be expected to generate a 10% return, thereby replacing the lost income. Stay at home moms need to be insured. How much would it cost to hire Mary Poppins to replace your wife and the mother of your children? Multiply that number by 10 and buy a term life policy. It is cheap.
Listed below are the types of coverages recommended by Dave. Anything that is not found on this list, such as credit life insurance, he considers a fraud and waste of money. One question came to my mind, “Is their any correlation between the baby steps and when to purchase recommended insurance?” For example, in Maryland it is illegal to drive a car without insurance even if you haven’t $1,000 in an emergency fund. Living without health insurance seems a very scary proposition. Would that come before baby step 2? I expect home owners insurance would generally be required by the terms of the mortgage. Disability seems more like a nice to have, something for step 7. Is there any guidance? My contact at Dave Ramsey’s organization replied, “Dave actually recommends getting your insurance lined-up as quickly as possible (while you’re working through Baby Step 1).”
1. Homeowner’s or Renter’s Insurance
2. Auto Insurance
3. Health Insurance
4. Disability Insurance
5. Long-Term Care Insurance
6. Identity Theft Protection
7. Life Insurance
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