For over 20 years I have worked personally with Dave Ramsey, his listeners and team members to help them make important and informed decisions about their insurance needs and the most cost effective ways to address them. Through the years I have responded to over 10,000 of Dave’s listeners regarding their insurance questions.
This blog contains many of the most frequent questions and answers since they provide an excellent resource to Dave's specific advice on very specific insurance questions. I hope you find this information to be a valuable resource that you can refer to many times in the future as you progress along your financial path. Click on the category noted which relates to your question so that you can see the posting currently available. If you do not see your question or still have concerns please don't hesitate to use the "Question Widget" noted on this site for further information or call us toll free at (800) 356-4282.
Many people are surprised that the advice from Dave and I doesn’t always involve the purchase of insurance as the only alternative. Insurance is a key component of any family's financial plan but it can also be a drain and a detriment if the wrong plans are purchased. Implementing the plans and approaches that Dave and I recommend, most importantly, the establishment of an emergency fund, will help reduce a families overall insurance costs and allow them to focus their dollars on more important things such as getting out of debt and growing wealth.
The thing to remember when determining the value at which you should purchase your homeowners insurance is that the replacement cost of your home and the appraised/market value are two different things and are not interchangeable. Whereas the market value is based on what comparable homes in the area are selling for, which has gone down all across the country, the replacement cost to insure a home to be rebuilt has actually gone up with inflation and other building costs. You also need to be careful since many companies no longer offer guaranteed replacement cost on their policies, meaning that if you are under-insured, you may not receive enough money to rebuild the damaged portion of the house if you experience a loss. The replacement cost is usually calculated on the per-square-foot building costs in your area, along with the specialty features of your home. The insurance companies, years ago, put the responsibility on the insured to determine the value of their home instead of relying on them, so the risk of under-insuring has grown over the years. This is why Dave so strongly recommends including either guaranteed replacement cost or extended replacement cost on your homeowners policy.
Learn how to calculate the coverage amounts you need for each part of your policy.
Dave recommends considering Medicare supplement plans as an option to cover gaps in Medicare. It is important to keep in mind, however, that options can be challenging to review since they can change from state to state. The supplement plans pick up where Medicare falls short, but keep in mind that if you have a healthy emergency fund, you can use that to help cover some of these costs as an alternative. Medicare Advantage plans are available in certain areas as well. These are basically private health insurance companies that take over completely for Medicare and often provide broader benefits at lower costs. However, many operate like an HMO, offering higher benefits but more restrictive physician and hospital lists. Since medical expenses are one of the primary reasons that people run out of savings during retirement, having a supplement plan can be very important. You should look at the overall costs and benefits of each plan and remember to use your emergency fund to help in this calculation.
Dave Ramsey recommends looking into a plan that includes a Health Savings Account (HSA). These programs allow you to save your money tax-free in an account you can use for most health-related expenses (that means everything from surgery to cough drops). A higher deductible option with no co-pays will likely decrease the cost of your plan substantially, allowing you to instead allocate that money to other priorities (paying down debt, growing savings – you know the drill). Another benefit of HSA-type plans is that, once you turn 65, you can use the savings portion of your plan to cover costs that Medicare and other supplemental plans may not. Another option Dave suggests looking into is a cost-sharing plan like that offered by Christian Healthcare Ministries.
Health insurance can be confusing, so please don’t hesitate to reach out to a Zander Insurance Guide for help understanding your options.
Dave strongly recommends considering your Health Savings Account (HSA) options since they can provide long-term flexibility and money-saving opportunities for dealing with health insurance. By taking a higher deductible with no co-pays, you can greatly reduce the cost of the plan, many times by as much as 50%. You can then use the cost savings to fund the savings portion of your HSA, which can be used to pay expenses that are subject to your deductible – you can consider the money in your HSA savings account part of your emergency fund. If you have no expenses, you keep the money and can continue to fund each year, allowing you to grow your fund for future health expenses. The higher deductible has also been shown to have lower future rate increases At age 65, any savings you have accumulated can be used to offset medical expenses not covered by Medicare or supplement type plans. Unless you had ongoing medical conditions that would cause the deductible to be met on a regular annual basis – or the group plan does not offer the savings over the PPO option – the HSA tends to be the best option. If you get a job with a company offering the HSA option as part of their group plan, you can consider rolling your savings into one plan.
The cash value in your policy will be available to you subject to the surrender penalties of the policy. These surrender charges are typically the most significant in the first three years, when the penalties represent 100% of any cash value in the plan. The penalties then tend to decrease each year you have had the plan and are typically gone after 10-15 years. When you attempt to cancel a cash value plan, most companies will try to imply that dropping the policy will have “serious” tax consequences. There is very rarely any tax due, however, and if there is, it is based on the amount you receive back that is in excess of the premium you paid. By multiplying up the number of years you paid the premium times the annual cost, you can quickly determine the extent of any taxes that may be due. The tax liability is only on the gain over the amount of premium paid, not the entire cash value amount. Even if taxes are due or surrender charges are applied, Dave advises cancelling these plans and moving on to more effective strategies. The key element to consider is making sure you have the correct amount of life insurance that your family needs. Remember never to cancel an existing plan until you have activated a new policy that meets your individual needs. Learn more about term vs. cash value.
When you attempt to cancel a policy that has accrued cash value, most companies will try to imply that dropping the policy will have “serious” tax consequences. There is very rarely any tax due and, if there is, it is based on the amount you receive back that is in excess of the premium you paid. By multiplying the number of years you have paid the premium times the annual cost, you can quickly determine the extent of any tax that may be due. The tax liability is only on the gain over the amount of premium paid, not the entire cash value amount. However, you need to include any dividends received during the policy term in addition to the cash value. Even if a tax is due or surrender are charges applied, Dave advises cancelling these plans and moving on to more effective strategies. The most important thing to consider is making sure you have the correct amount of life insurance to meet your family’s needs. Remember: never cancel an existing plan until you receive the new policy you are considering and you have reviewed it to make sure it meets your individual needs. Learn more about the benefits of choosing a term life policy.
When it comes to selecting a plan, the first thing to determine is whether you have access to a group plan through your employer. Group plans are typically easier to qualify for and tend to be lower-cost alternatives. Many people are not aware of the benefits offered by their employer – so it’s smart to ask if you don’t know.
If your employer doesn’t offer this benefit, you’ll likely need to consider an individual disability insurance policy. In these instances, Dave recommends a benefit period of at least five years, but prefers to age 65 if it is within your budget. Since 85% of disabilities are resolved within five years, this is the shortest term that he feels is appropriate. A benefit amount equal to 60-70% of your monthly income is a good starting point and can be reduced based on your progress with debt and savings. An elimination period (or “waiting period”) of 90-180 days is recommended since you can rely on your emergency fund during this period, driving down the cost of your policy. Many of the riders to these plans are “bells and whistles” that really add very little value to the overall protection. As long as you have a guaranteed renewable plan through a quality company, these are be the initial areas of coverage on which you should focus.
It is important to keep the risk of long-term disability in perspective. Overspending for a “Cadillac” type plan at the detriment of other financial goals is not recommended. It is a mistake to over-insure this risk and not equally focus on other types of core insurance plans such as term life, health insurance, etc. as well as concentrating your efforts on paying down debt and growing your savings.
The elimination period, also known as a “waiting period,” acts as a deductible. It determines how many days you must be disabled before the monthly benefit will be paid and is a standard feature of a long-term disability policy since the plan is intended to provide longer term protection, rather than step in for short-term situations. The longer the elimination period, the lower your annual cost. A 90 or 180-day elimination period is recommended since you should use your emergency fund for the short-term needs. You can rely on your emergency fund for short-term income interruption, as it should have 3-6 months of expenses saved up. That way, you aren’t paying an insurance company a repetitive premium for a risk that is measurable and may not ever occur.
The disability income benefit is the monthly amount of money that the insurance company will pay to you if you become totally disabled. This amount is typically limited to a maximum of 60-70% of your current monthly income. Disability benefits are received on a tax-free basis (if paid with after-tax dollars), so the entire amount is available to you for your personal and family needs. It is recommended that you start at this 60-70% level and consider reducing it if you have made strong progress with your debt and other savings programs. As your emergency fund grows, you can also consider a longer elimination period to help bring down the cost. Find more answers to frequently asked questions on Zander’s disability insurance education page.
When shopping for home insurance, you’ll likely be asked if you’d like to add on an umbrella policy.. Whether or not this is necessary for you largely depends on the size of your personal assets and net worth – the greater your assets, the higher your risk. Once you have decided whether an umbrella policy is right for you, it’s time to select your coverage amount. The value of your home is a good place to start in determining this. Your community identity and profession can also play a factor in this decision. Physicians, for example, often carry higher limits since most people assume that they have more assets, and therefore more insurance – so suits against them tend to be filed at higher amounts. The cost for additional million-dollar layers are also less than the first layer, so the cost of higher limits are an even better value. For most people, a limit in the $1-3 million range would be more than enough unless they have accumulated significant wealth. If someone has a $220,000 home, is in debt with very limited savings, then just carrying $500,000 of personal liability on your home and auto would be a very adequate level, and Dave would recommend using that money now for debt reduction.