Let’s examine burial insurance Dave Ramsey before you decide which type of life insurance is good fit for you. Dave Ramsey is a well-known radio show host and bestselling author on financial management.
Dave Ramsey is not a big fan of burial insurance or whole life insurance with cash value accumulation. He thinks any cash value life insurance is a bad investment. He even called whole life insurance a ripoff.
Dave Ramsey recommends term life insurance as the best policy if your family needs protection from financial distress after an unexpected death. He says that you have very little need for life insurance if you have enough cash saved to pay final expenses.
In this article, we will look into Dave Ramsey’s views on cash value insurance, including both burial insurance and whole life. Read on, to know if Dave Ramsey could be wrong on whole life insurance specifically burial insurance.
BURIAL INSURANCE DAVE RAMSEY
According to Dave Ramsey’s assessment, burial insurance whole life is expensive and at times unaffordable. Dave also says that whole life insurance is sold by overly aggressive life insurance agents.
Whole life insurance falls under the category of permanent life insurance. Most people equate permanent life insurance policies with cash value.
Permanent life insurance includes:
Permanent life insurance policies with a cash value are designed to stay in force for your entire life. The policy never expires even if you grow old or develop a severe medical condition in your later years. This policy won’t cancel, reduce, or revoked by the insurance company as long as you keep paying the premiums on time. The death benefit doesn’t decrease, and the premiums are fixed. In time, you can withdraw or make a policy loan on the cash value.
Dave Ramsey is not fond of whole life insurance or plans with cash value accumulation for the following reasons listed below:
- Whole life insurance is more expensive than term insurance
- There shouldn’t be a need for life insurance beyond 20 or 30 years
- Do not mix life insurance with investments
- The rate of return on investment in whole life is lower compared with other types of investments.
WHOLE LIFE INSURANCE CAN BE EXPENSIVE
We agree with Dave’s analysis that whole life insurance can be expensive compared with term life. It even costs more than universal life insurance because it lasts the whole life. It can be tough to compare term to whole life because there are distinct differences. With whole life, your death benefit is guaranteed to be paid to your beneficiary as long as you pay the premiums.
On average, it would cost $315 for a 50-year old to get a $250,000 whole life insurance policy, while it would only cost around $32 to purchase a 30-year term life insurance for the same coverage amount.
Dave Ramsey recommends buying term life insurance and saving the difference in premium between whole life and term life policy and investing the difference in mutual funds or other investment vehicles.
Dave says that one-third of the people who purchased whole life insurance let the policy lapse within five years because the premiums are expensive. It would take 15 years for the surrender value to be equal to the premiums you paid. He concluded that it won’t make a good investment if you would only have it for less than 20 years.
Dave also points out that only those who keep the policy for more than 30 years will reap from their cash value. That’s a big commitment that most people can’t keep.
According to statistics, in 30 years only 20% of those who bought whole life insurance will keep their policy. Therefore, 80% are basically letting the insurance companies use their money in exchange for a lower interest rate which they would get if they put it in their 401(k).
THE RATE OF RETURN ON INVESTMENT IN WHOLE LIFE IS LOWER
As for accumulating wealth, the whole life is slow and steady. The cash value accumulation pales in comparison with mutual funds over the course of 30 years. Well, Dave uses very high rates of return in his examples. While it’s true that a 10% to 12% interest rate is excellent, mutual funds carry more risk with those high unrealistic rates.
DON’T MIX LIFE INSURANCE WITH INVESTMENTS
Dave Ramsey teaches people to keep their investment and life insurance separate. He is urging people to buy term insurance and invest the rest. While this strategy can work well for most people, but some want to diversify their investment, and sometimes cash value policy can be a smart way to plan financially.
IMPORTANT NOTE: Dave benefits financially from the sale of term life insurance through his term life insurance financial affiliates.
THERE SHOULDN’T BE A NEED FOR LIFE INSURANCE BEYOND 20 OR 30 YEARS
If you are 40 years old and you invest your money in a mutual fund rather than buy whole life insurance, you will have about $500,000 when you pass away at age 90. After 20 or 30 years you won’t need whole life insurance because you have saved enough money for your own funeral. Dave calls this being self-insured.
IS THERE A NEED FOR LIFE INSURANCE BEYOND 20 OR 30 YEARS?
There are some people in their 50s and 60 asking for advice and quotes for life insurance. Most of the time, the caller realized that their term insurance is expiring and they still need coverage.
The reasons for extending life insurance coverage beyond 20 or 30 years depends on the applicant. Some people had setbacks with employment and couldn’t invest money the way they planned it. Other people may have medical challenges that caused some financial setback.
Sometimes there are no setbacks, but the applicants realized they want to provide money to their loved ones after their death.
IS BURIAL INSURANCE A BAD INVESTMENT?
Let’s be clear. Burial insurance whole life is not an investment. It is only a guaranteed financial vehicle. There is no loss element as long as you pay the premiums. Whole life burial and final expense insurance is not an investment meant to compete with mutual funds.
It is a permanent life insurance policy that gives financial protection for the rest of your life. It has a guaranteed payout as long as the policy is paid on time. The cash value of whole life policy is a benefit that is built into it. You can borrow from it to ensure your premium will not lapse in the future.
The premium is locked in from the age you take it to the day it pays out benefits. The amount of premium is permanent and will never increase as you age.
Whole life insurance is ideal for small final expense or burial insurance because the premium will never increase and the death benefit payout will never decrease as long as you keep paying the policy.
WHEN TERM INSURANCE IS NOT YOUR BEST OPTION
There are circumstances where term insurance may not be your best option for life insurance coverage. The only reason you would get burial insurance is to make sure that there is enough money to bury you or pay for your funeral because you don’t want your family to have to pay for that.
Burial insurance is designed for the senior population those who are 50-85 years old and older who want to buy life insurance to cover their final expenses. It also caters toward those with severe medical conditions that cannot qualify for term life insurance.
Burial insurance uses whole life insurance that Dave Ramsey is not fond of. The reason why this product is superior to term life insurance is that it provides permanent coverage up to age 121 years old that will not expire with advancing age or severe medical conditions.
People generally purchase term insurance to replace income, pay off debt and mortgages. The reason why older individuals buy funeral insurance plan using whole life insurance is that they want the peace of mind that the insurance benefit would be paid to their beneficiary to take care of their final expenses.
The problem with term life insurance is that it is not permanent; it is designed to terminate after a period of time (usually 10, 20 and 30 years). Once you out your term policy, there will be nothing left for your beneficiary when you die. It goes against the concept of security, which is knowing there is money when you absolutely need it.
The other important issue with term life insurance is it becomes increasingly difficult to qualify for term life as you get older. The senior citizen may begin to have health issues that make them ineligible for term life insurance. Only three out of ten applicants who are 60 or older will be approved for term insurance, so 7 out of 10 are getting declined for term insurance and can only qualify for burial insurance.
Dave Ramsey’s recommendation on investment is sound. The critique here is not of Dave Ramsey but his penchant for term insurance that does not apply in every situation. The truth is there are many people that won’t get the full advantage of term insurance if it will be used to take care of their final expenses.
Lots of American never have enough savings to pay out of pocket for their funeral and final expenses. They are those who don’t make a lot of money for retirement and rely on a pension or social security month after month. There’s no way they can save enough money to take care of a funeral or cremation. We’re talking about millions of people that don’t want to leave their final expenses to their family.
Burial insurance whole life makes a lot of sense for this marginal part of society that’s why we disagree with Dave Ramsey’s advice on life insurance. We simply don’t think that it applies in every circumstance.
Zander Insurance which is solely endorsed by Dave Ramsey agrees with our point. There is a comment on their life insurance website which stresses the importance of whole life insurance for the purpose of burial and final expenses. And this is to quote:
“SHOULD I BUY A BURIAL POLICY?
Term life insurance really should not be used as a burial or final expense type of plan. Since the term period can expire prior to the death of the insured, it is not a viable method to plan for final expenses. The strategy of buying term life insurance is to simultaneously pay down debt and grow your savings and investments so when the term expires you no longer need life insurance.
Dave does not recommend purchasing life insurance for just final expenses since in most cases he feels it should be paid from your emergency fund and savings. However, in some extreme cases, you may want to consider a plan through (BUSINESS NAME REMOVED) Insurance, which sells burial type policies.
Dave does not recommend these since they are cash value type plans, but they may be the only way to address this type of issue if you are dealing with an older individual and their personal financial situation does not allow for any other approach.”
So there you have it, Zander Insurance which handles Dave Ramsey’s term life insurance product simple states that there is a circumstance that burial insurance is better than term insurance, although Dave doesn’t agree that burial insurance does make a lot of sense than term life.
People who buy burial insurance cannot afford to save enough money to pay for the funeral, or they simply don’t want to. Some people who are on a fixed income are afraid that they won’t have enough time to adequately save every month to pay for their funeral when they pass away. Thus, leaving their family to pay for their final expenses when they are gone.
While we certainly agree with Dave Ramsey on some of his financial advice and recommendations, there’s one area that we disagree with. Term life insurance is not the best all the time. Burial insurance whole life is the only option for coverage by those who are in the marginal sector and older population. It provides peace of mind and insurance coverage to those who want to take care of their final expenses to remove the financial burden from their family.
HOW CAN FUNERAL FUNDS HELP ME?
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