Last week – Buyer Beware
Last week was our 6th week in Dave Ramsey’s “Financial Peace University“. Week 6 talked about being an informed consumer, and not falling prey to the tactics retailers use to get you to buy. Some important points:
- Learn the marketing method companies use to market products and services to you. Know you can be in control!
- Wait 24 hours before making a major purchase – larger than $200.
- Always talk to your spouse before making a major purchase.
The main thing that I got out of week 6 was that we are all very susceptible to marketing techniques companies are throwing our way – whether we admit to it or not. We need to be aware of when we’re being sold a bill of goods, and be able to tell the difference between a good deal from a good salesman.
This week – Clause and effect!
- Make insurance coverage a priority to avoid a financial disaster.
- Learn the types of insurance you really need and get them NOW!
What kind of insurance do I need?
This lesson talked about why you need insurance, and what types of coverage you need to buy when you’re looking for your policies. So, what types of insurance can you buy?
- life insurance
- health insurance
- homeowner’s insurance
- auto insurance
- disability insurance
- long term care insurance
Dave Ramsey suggests buying insurance in all of these categories, but depending upon your situation your level and types of coverage may vary.
Life Insurance
This is one area that Dave Ramsey says a lot of people get hoodwinked. There are two main types of life insurance policies, term life and whole life/cash value. From Dave Ramsey’s website:
Sadly, over 70% of the life insurance policies sold today are cash value policies. A cash value policy is an insurance product that packages insurance and savings together. Do not invest money in life insurance; the returns are HORRIBLE. Your insurance person will show you wonderful projections, but none of these policies perform as projected.
According to Ramsey there is almost no situation where you would ever want to buy whole life or universal life insurance. Term insurance is almost always cheaper, and you can invest the difference of what you would have paid to whole life insurance. When you invest the difference on your own you’ll be able to get much higher returns – and you won’t be paying all the miscellaneous fees to the life insurance company.
According to Consumer Federation of America, Kiplinger’s Personal Finance, and Fortune magazines the return for a whole life policy will average 2.6% per year, 4.2% for universal life, and 7.4% for the new-and-improved variable life policy that includes mutual funds. The same mutual funds outside of the policy average 12%. Obviously you can do better investing outside of your life insurance.
The other catch about whole life insurance is that if you do die, your family doesn’t get the cash value back that you invested in the policy. They will only get back the face value of the policy. Any savings you have accrued are surrendered to the company!
So, to review – BUY TERM INSURANCE ONLY.
photo credit: Laineys Repertoire
Health Insurance
Health insurance is something that everyone needs to buy. If you don’t believe me, just look at the stats. Medical bills are the number one cause of bankruptcy! My wife and I have personal experience in this area. My wife had a life threatening blood clot in her leg this year, and was forced to undergo multiple procedures and several weeks of hospitalization, much of it in intensive care. Without insurance we most likely would have been faced with hundreds of thousands of dollars in medical bills. We probably would have been forced to declare bankruptcy.
Fortunately we had good insurance coverage and we were able to top out our medical expenses at around $2000. That’s quite a difference from $200,000. We were able to pay our medical expenses out of pocket with cash from our emergency fund. (By the way, when paying your medical bills, don’t forget to ask for a reduction in your bill because you’re paying cash).
Dave suggests that people look into Health Savings Accounts (HSAs) as a lower cost option to insure your family. If your company offers a health plan, look into that as well, usually plans offered through your company will be cheaper than if you bought it on your own.
If you don’t already have insurance, start looking today! I recommend getting a rate quote from a provider like eHealth Insurance. You can get quotes from several different companies, and choose from hundreds of different plans:
Homeowner’s and Auto Insurance
Some points to remember when buying Homeowner’s and Auto Insurance:
- Raise your deductible to lower the rates (only if you have an adequate emergency fund)
- Carry adequate liability coverage
- Consider dropping collision coverage on older cars
- Homeowner’s insurance should carry guaranteed replacement cost
- Once you have some assets, an umbrella policy might be a good buy to avoid a financial catastrophe
Disability Insurance
Disability Insurance is designed to replace income that is lost due to a short-term or permanent disability. Dave Ramsey suggests getting this type of insurance. If your workplace offers disability as a part of your employment, even at a reduced rate – you may want to consider it. Things to think about when buying your plan:
- Consider a longer elimination period for your policy (the time it takes for the payments to kick in from your disabling event). If you have an emergency fund, you can have a longer elimination period, and pay less for the insurance.
- Buy it for 65% of your current income, and buy the policy with after tax dollars.
Long-Term Care Insurance
This is a good idea if you’re 60 or older. Any younger and you probably don’t even need to consider it just yet. After 60, it’s important because almost 7 out of 10 people over the age of 65 will require long term care at some point in their lives.
Next week
Next week is a lesson entitled “That’s Not Good Enough!” which talks about how to find a deal, and negotiate when you’re buying.
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Awesome tips Pete! I too can relate to the medical insurance. Our son has arthritis and had we not had medical insurance we could be paying up to $1600 a month for his meds. We’ve also been using an HSA account for the last three years. We’ve adjusted it each year to compensate for the upcoming medical expenses we think will arise.
I agree that you need to have these types of insurance to protect your financial status, however if you don’t have money to buy them, what would you do? This is especially an issue for those who are working at home, their priorities would normally be rents, foods, credit cards bills and other fees. Unless they are full-time bloggers that earn huge amount of $$$ then this will not be an issue.
Sams last blog post..What Does It Take To Be Filthy Rich?
@ Sam – I don’t have a great answer for you, except that you have to do your best to improve your income, get rid of your debt, make a zero based budget and stick to it, and eventually you’ll be able to afford insurance. I know that we have a lot of programs that will help people who can’t afford it – to obtain insurance as well.
Found this series today – and am considering FPU (we’ve read the books, doing the plan, but maybe want FPU too!)…Just a point to consider – on Dave’s shows, the only time he has conceded to keeping whole/universal life is when a person is otherwise uninsurable due to their medical status. Like a 50 year old who’s had a heart attack or some other pre-existing condition that would keep him/her from getting term insurance.
thanks for these posts, by the way…
yeah, that’s about the only time he suggested keeping whole or universal life insurance policies, when you are uninsurable otherwise.
I highly recommend FPU, you’ll get a lot more out of it than just reading the book alone!