Dave: NEVER EVER BUY WHOLE LIFE, only buy term. Invest the difference in premium in “good growth stock mutual funds” and you’ll have alot more.
I have a few problems with that.
First the dogma. All truth is reasonable, so theres no need to go nuts on a matter if its true
Second, all he’s really saying here is that instead of “investing money in life insurance, invest money in the stock market.” The reason why the reward is so much greater is because the risk is so much greater as well.
But in a reasonable estate plan, the goal is more about security for your survivors than getting rich.
Third, Any reasonable estate plan also factors in dramatic life changes. For instance, an incurable disease in its late stages, such as cancer. If you only have term coverage, when your term runs out, you cant buy another policy because no one will insure a cancer patient. With no cash from insurance, a person risks losing a significant portion of their nest egg to estate taxation. Or with no cash at all, a person risks losing personal property to pay it.
I personally would suggest that a person make reasonable estimates of what their estate will be worth at death. Estimate that the Federal estate tax exemptions will be $1,400,000. I say this figure because it splits the difference between the lowest estate tax exemption in history ($650,000) and the highest ($3.5 million) and and rounds it out.
Buy at least one whole life policy that can cover that tax liability. If you project an estate worth less than the 1.4 million dollar exemption, therby making you Federal estate tax free, buy a low whole life policy, around $100,000, so that funeral expenses and other things are covered without your family having to liquidate your assets to pay them, or if you live long enough for the cash value of the policy to be higer than the death benefit, (which usually takes at minimum 20 years) you get to enjoy a hefty sum of unexpected money while your still alive.
Meanwhile, follow Daves advice in having insurance equal to 10 times your households annual income. If your family makes 50 grand, and you already have the 100,000 whole life, buy 400,000 in term insurance to make an even $500,000
Investing in the markets may very well cause you to end up with more money. But thats only if all goes well, like you never dying in an accident. Building wealth is a good thing, but I dont think its more important than ensuring that your family is taken care of regardless of what happens to you.
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Dave Ramsey is right, at least about insurance.
1.) I don’t follow that statement.
2.) I’m not at all sure the stock market is riskier then insurance.
For one thing, remember AIG? It only exists because a pro-big business administration spent a trillion to put it on life support.
For another, if you have whole life insurance, you ARE in the stock market. Most Annuities and whole life policies contain mutual funds.
Also, the real reason you get more of a return from stocks then insurance is insurance companies charge enormous fees.
2a.) Since when is financial planning all about passing on money to your survivors? For most people, financial planning is about having enough money to buy a house, pay for your kid’s college education, and paying for retirement. If you leave money to your kids when you die, that’s just gravy.
3.) Life insurance protects your heirs from the risk of you dying young. Retirement savings protect you from the risk of you living to a ripe old age. Statistically, more of us die of old age then die young. Therefore, preparing for the possibility of NOT dying young should be a higher priority. Once you are confident you are saving enough for retirement, you should worry about life insurance.
Few people really save enough for retirement, so for a lot of people the choice is whether to skimp on retirement saving to pay for life insurance.
Only millionaires have to worry about estate taxes. (By definition….there is a million dollar exemption). Estate taxes are not an issue for most Americans.
Trying to predict what Congress will do is a fool’s game. It depends on who is President, what issues the President decides to compromise on, how midterm elections go, etc etc.
Every Bank VP I spoke with predicted Congress would change the law before the “year without an estate tax”.
Realistically, few Americans can afford life insurance equal to ten times their household income while contributing 10% of their income to retirement savings.
Once again, I’m more likely to reach old age then die young in an accident. Building wealth is about having money to take care of me when I retire, and to pay for my kid’s education. Most people simply don’t (or can’t) save enough to do that without the returns the stock market offers.