Dave Ramsey’s FPU Class, Week 6 Lesson: Insurance

The Dave Ramsey Financial Peace University multi-week class has an entire lesson on insurance, or risk management. On the surface this subject doesn’t seem all that spiritual, but protecting our family and the property God has given us, using as few dollars as possible is very good stewardship. To underline a few items from this lesson, and a few things that need a little more information…

  • Evaluate your life insurance Amount: if you have minor children and a mortgage a good rule of thumb is 10 times income (an insurance expert or financial planner can help you calculate your amount). You can subtract from that number your group life amount and other insurance, savings and investments. If your spouse doesn’t work outside of the home, she probably needs it too.
  • Life Insurance Type: Most personal finance experts, and financial planners recommend term insurance since it is pretty inexpensive, and buy as long a term as you can afford usually, such as 10 – 25 year level term. The length of the term will depend upon your age, affordability and overall financial plan.
  • Permanent Life Insurance: Dave and other financial experts recommend against using permanent (also known as whole life, universal and variable life) as an investment vehicle. This is because the fees are high, the net overall rate of return is modest, and the need for permanent insurance declines as we get older, as well as your savings and investments build up. Sometimes life doesn’t always go according to a neat plan with careers, business or family (e.g., death, divorce, starting families when we are older, and step families). Also, the ‘buy term and invest the rest’ depends upon exhibiting great personal finance habits throughout life. Considering these last two points…
  • Replacing permanent insurance with term: If someone evaluates their financial plan, and decides to replace their existing permanent insurance with term, they should be careful.  First of all the new policy has a period of waiting for incontestability and suicide. Secondly, being able to switch to low cost term is dependent on one’s health- so before you switch, make sure that you are insurable and at a good rate, and the new policy is in force until you drop the old one. Lastly, especially if the permanent policy has been in force for a long time, it is good to consider its overall net cost (examine’s its dividends {that could pay the premium} and cash value annual increases. Obtain an inforce ledger first of the existing policy to examine, and get second or third opinions before dropping- you have incurred a lot of upfront cost in the permanent, so don’t be hasty to drop it too quickly.
  • Competitive casualty insurance: If you haven’t shopped your auto and homeowners insurance in a while, call some independent and captive agents for quotes for various deductibles, you may be able to save a goodly amount.  Be sure to have your policy’s declaration page or description of coverage handy to refer to.
  • Umbrella coverage: Talk to your agent about ‘personal catastrophe’ or ‘umbrella’ insurance to protect you from excess liability. A few million dollars of coverage costs less than $200 usually.
  • Replacement cost: Ask your agent about your homeowner’s ‘replacement cost’ coverage for dwelling and contents.
  • Riders: Look into riders for increased limits on certain kinds of property, collectibles, and jewellery, as well to be covered if a sump pump fails or sewage backs up.
  • Long term care insurance (LTCi): If you are in your 50’s it is okay to consider this coverage now before age 60. Dave recommends this age, since that is usually the best time statistically considering normal life plans, accomplishing the baby-steps, and premiums. Rates go up with age, and sometimes our health changes more as we age, so if your financial plan permits LTCi, before age 60, that is okay.
  • Disability Insurance: Review your short-term and long-term disability coverage at work, even if you have it, it may be a good idea to consider supplemental since group DI is usually taxable.
  • Estate Planning: Dave recommends good estate planning. Be sure to contact an attorney about having a will, power of attorney written for you. If you believe in end-of-life planning, ask about living wills and health care power of attorney. Trust planning makes good sense for asset protection, and to take care of minor children, not including privacy and tax and probate cost minimization.

Conclusion, we can have insurance to protect us financially from almost everything that can happen to us, however the most effective protection is prayer:

  • Matthew 6:9-13 “This, then, is how you should pray: “‘Our Father in heaven, hallowed be your name, your kingdom come, your will be done, on earth as it is in heaven. Give us today our daily bread. And forgive us our debts, as we also have forgiven our debtors. And lead us not into temptation,but deliver us from the evil one.
  • Ephesians 6:11-13 “Put on the full armor of God, that you may be able to stand firm against the schemes of the devil. For our struggle is not against flesh and blood, but against the rulers, against the powers, against the world forces of this darkness, against the spiritual forces of wickedness in the heavenly places. Therefore, take up the full armor of God, that you may be able to resist in the evil day, and having done everything, to stand firm.”
  • Psalm 27:1-3 “The LORD is my light and my salvation; Whom shall I fear? The LORD is the defense of my life; Whom shall I dread? When evildoers came upon me to devour my flesh, My adversaries and my enemies, they stumbled and fell. Though a host encamp against me, My heart will not fear; Though war arise against me, In spite of this I shall be confident.”

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