The Dave Ramsey Pitfalllegacy
Like many of you I am a big fan of the Dave Ramsey show. Dave gives very sound advice on reducing unnecessary spending, the need to save for a rainy day, and the goal to be debt free. However, not all the advice Dave gives is “on the money” (pardon the pun). He tends to have a once size fits all approach that fails to take into account the unique circumstances of each individual or family.
Let me explain. When it comes to life insurance he steadfastly sticks by his mantra – “buy term insurance and invest the rest”. Term insurance is relatively inexpensive and is in effect only for a period of years. The terms are typically 10, 20, or 30 years. After the term expires the insurance goes away. On the other hand, whole and universal life policies are considered permanent insurance because a person can keep the policy in force as long as they continue to pay the premium. In addition, these policies allow the owner to use the accumulated cash value inside the policy to help pay the premiums in whole or in part as they get older.
Here’s why Dave’s simplistic approach may not be the right advice for everyone. When a person’s term insurance expires one of three things will happen: 1) the policyholder will have to pay higher premiums to obtain new insurance, 2) the person will go uninsured because their health has deteriorated and they are uninsurable, or 3) they will go uninsured because cannot afford the increased cost of insurance.
Dave’s thinking is that if you have been investing, as well as paying the cost of your insurance, the value of your investments will eventually be enough to replace the face value of your insurance. Wow! That advice is built upon a whole lot of assumptions that may be wrong.
First, how can anyone predict what the market will do during your retirement? Suppose we have another market crash that cost retirees 30% of their asset value. You may not have any assets left to pass on to family members. Second, life happens. Divorce, job loss, aging parents, the cost of college, a sagging economy are all factors that can affect what a person is able to set aside during their career. If your retirement savings end up being less than what you hoped for, an expired term policy won’t do your family much good. Finally, it may be important for some people to leave a legacy beyond their family such as a charity or educational institution. Without a policy of insurance in force that opportunity may be lost.
The point is everyone’s financial situation is unique. Be sure when you put a financial plan together that the plan is one you can afford and that meets all your objectives. Just because Dave said it doesn’t mean it’s the right fit for you.