Friend and freelance writer Les O’Dell shares this diary entry from the seventh session of Financial Peace University discussing what types of life insurance you may need. FPU is 13-week course from national talk-show host Dave Ramsey.
The seventh week of Financial Peace University dealt exclusively with insurance. It was a lesson (believe it or not) I was actually looking forward to. My wife and I both used to work in the medical malpractice insurance field, and we both were licensed insurance agents. For that reason, I was overwhelmed by the thought of an hour and a half on insurance.
What is Insurance?
In the teaching for the evening, Dave Ramsey discussed the purpose of insurance – spending some money to keep lots more of it – and he gave a rather simple definition of insurance. He described the concept simply as a tool to transfer risk. Much like he taught about mutual funds, the idea is that a large group of people all pool their resources together to avoid financial catastrophe in the event of, well, a catastrophe. In the lesson, Ramsey discusses seven basic kinds of coverage:
- Homeowner’s or Renter’s
- Auto Insurance
- Health Insurance
- Disability Insurance
- Long-Term Care Insurance
- Identity Theft Protection
- Life Insurance
While the specifics and details of what he shared is too complex and complicated to share in a short post, suffice it to say that Ramsey offers common sense tips and ideas that work hand-in-hand with the Baby Steps to make sure individuals and families are protected.
Insurance at Home
Anyone who has ever listened to The Dave Ramsey Show knows how much he stresses having a high level of insurance for your home (if you own it) and for the contents (regardless of whether you own or not). Given that he teaches people to be working through the Baby Steps, he suggested that people with a fully-funded emergency fund should consider a higher-than-normal deductible to increase premiums.
He also encouraged homeowners to purchase a policy with Guaranteed Replacement Cost. That way, coverage keeps up with any increases in the value of your home automatically.
Dave recommended avoiding the state minimum levels of liability coverage, in favor of a much higher level of liability. Like in homeowner’s coverage, he reminded us that with an emergency fund, we can probably handle a higher deductible and may want to even consider completely dropping collision insurance (that pays for fixes to your own car).
Here again, a key to saving on insurance premiums is to increase the deductible and/or coinsurance amount. He also recommended a Health Savings Account, a tax-sheltered savings account for medical expenses. HSAs have very high deductibles, but often pay at 100 percent above the deductible.
Guard Against Disability
This insurance, which Ramsey says is among the most affordable types of coverage, replaces your income in case you cannot work because of a disability. He recommended the specific types and levels of disability coverage.
Long-Term Care Coverage
He shared that the number one financial challenge facing people today is how to care for their aging parents, and reported that after age 60 some 70 percent of Americans will require a nursing home stay of at least six months. For that reason, he recommended long-term care insurance be purchased at age 60.
There is a real difference, he said, between identity monitoring and insurance. He recommends insurance protection against someone stealing your identity. With the protection, the insurance carrier will work to “clean up the mess” rather than you – and he said it often takes as much as 600 hours to resolve problems from identity theft.
Life Insurance Explained
A majority of the teaching was about the difference in life insurance products. Two main points were emphasized. One, the goal of good financial planning is to become self-insured, meaning having enough savings that you don’t even need life insurance. Two, if you do need life insurance, the only type to purchase in his opinion is term life insurance equal to eight to ten times your income.
A Powerful Wrap
The evening’s teaching closed with the most powerful presentation of the entire 13 weeks. Ramsey told the story of a 28 year old he met who was suffering from brain cancer. Prior to the diagnosis, Steve Manis had completed most of the Baby Steps and had purchased the suggested level of life insurance. Manis told Ramsey that even though the doctors gave him just a few months to live, he knew that his wife Sandy would be okay. Manis passed away three days before his son was born. While life has been tough for Sandy and the baby, they are financially secure because of what Steve had put into place.
Each of us in class that night wiped tears from our cheeks as we left, and most of us promptly made changes to our insurance coverages to better protect those we love.
Les O’Dell is a freelance writer living in Carbondale, Ill. His work can be seen in a number of newspapers, magazines, publications and websites. He is co-author of the popular “He Said, She Said” newspaper column. He can be found on the web at www.lesodell.net. Les is not affiliated or endorsed by LPL Financial.