Class this week was about insurance. You could hear the groans and sighs around the auditorium. Insurance is boring and it isn’t fun. Plus, I think people don’t like to talk about it because it means thinking about your mortality (in the case of life insurance), catastrophe (home and auto insurance), illness (health, long term care, and disability insurance), and all the ways you could be sued (umbrella insurance). None of these are fun topics and most people shy away from them as long as possible. Which is part of the problem.
Dave points out that insurance is every bit as vital to your financial well being as having emergency funds and being debt free. It does you no good to be debt free and have a year’s worth of expenses in the bank if you cause a car accident and get sued for five million dollars. All your hard work to get to that point was for nothing because you will be completely wiped out. The same will happen if you get very ill without health insurance, if your home burns down or is severely damaged without homeowners insurance, or if you become disabled and can’t work but don’t have disability insurance.
Dave talked about the seven main types of insurance that you should have: Homeowner’s/renters, auto, health, disability, long-term care, identity theft protection, and life insurance. The only one on that list that is debatable to me is identity theft protection. By law, if you are the victim of fraud you do not owe the money. You will not “lose” any money if you are the victim of ID theft and you don’t have insurance, unlike how much you will lose if your home burns down uninsured. Identity theft insurance does not pay you any money if you are defrauded. The only thing it does is to monitor your credit for early signs of trouble and (the good policies) provide a counselor to help you restore your good name. You can monitor your own credit and you can clean up the mess yourself for free, without insurance. Yes, it will take some time, but you can do it on your own. You buy insurance to cover big losses that you cannot afford on your own. I will not pay for ID theft insurance since there is no major monetary loss to me and I can handle the credit monitoring and restoration of my good name on my own. That is not the sort of thing that’s worth paying insurance premiums for. But, as I noted in an earlier piece, Dave has an insurer that he recommends, so I guess he had to get the pitch in.
Dave spends a good part of the lesson talking about why cash value life insurance is a bad idea. This is one of his pet peeves that I agree with. You should only buy term life insurance. Your goal in getting life insurance is to make certain that your family is provided for in the event of your death. Period. It’s not to invest your money and it’s not to get cash back at the end of the policy.
Your long term goal is to become self insured by having enough money to cover expenses, having enough saved for retirement, having no debt, and raising your family and sending the kids out into the world. Once those things are taken care of, you no longer need life insurance because if one of you dies, everything can be taken care of and paid for without that money. You carry life insurance to protect your family while the kids are young and while you’re building up that nest egg to take care of your old age. Thus, you carry it for a “term” of ten, twenty, or maybe thirty years, just to keep you covered until you can stand on your own. Because they aren’t permanent and have no investment component, term policies are much cheaper than whole life or cash back policies. Cash back policies are hugely expensive, almost never pay out the cash value, and deliver poor investment returns when compared to IRA’s or other investments.
You also don’t need life insurance on children because life insurance is designed to replace an income in the event of your death. As Dave says, “Children don’t make money, they use money.” If you child dies, it’s sad and it’s horrible but it isn’t going to affect the family’s finances, unless the kid is a superstar earning millions in Hollywood. If you must carry insurance on a child, only carry enough to cover burial expenses which, in most cases, can be added as a rider on your own life insurance policy.
Dave also talks about types of insurance not to buy, including credit card insurance, credit protection, cancer policies, accidental death, or mortgage life insurance. Many of these are covered with other policies (i.e., cancer is covered by health insurance) or are so expensive as to not be worth it. A good life insurance policy can go toward paying your mortgage or paying off any debts if you die, so paying for expensive extra coverages isn’t necessary. Just increase your life insurance amount to cover everything you want paid upon your death. Life insurance is much cheaper than specialty insurance policies. I’d put identity theft protection in this column, too, but Dave says it’s one of his essentials.
Before I move on to small group, here’s a side story: Coincidentally, this week’s lesson came just as our homeowner’s insurance renewal bill arrived in the mail. Last year our rate went up dramatically. Most of the increase was tied to the rebuilding cost. I didn’t think to question it too much, since we were just coming off the $5/gallon gas year where the costs of everything skyrocketed. I knew that building materials had also gone up because many are made from petroleum products. We were also coming off a year with a lot of hurricanes and other natural disasters and I know insurers get freaked out and raise rates whenever too much of that happens. Like I said, I didn’t like it but I didn’t think to question it too much. Fast forward a year. Our new bill arrives and it’s gone up even more. Way more. Now I’m mad. So I call around for quotes. I’m getting quoted rates that are about half of what we are paying. Now I’m curious. So I call my insurer and ask what’s up and tell them that we’ll have to cancel because I can get the same insurance elsewhere for much less. So the lady piddles around on the computer for a while and comes back to verify my information and my home’s relevant statistics.
“So, I show you live in a 2,100 square foot house.”
“Um, no. It’s 1,600 square feet.”
“You have an outbuilding, correct?”
“And you recently added a sunroom?”
“Um, no again.”
I don’t know what on earth happened at the insurance company, but somehow they had us living in the WRONG HOUSE. The address and everything was right, but whatever building they were thinking was on this lot is not on this lot. I don’t know whether they went to update their files and someone updated ours with someone else’s information, or if the computer somehow crossed things up but man, what a screw up. No wonder our insurance jumped sky high. She went back and discovered that everything had been correct up until last year. Then for reasons unknown it went haywire. They are still looking into it, but we will be getting back some money from last year, and our premium for the coming year will be about half of what they quoted us, or more in line with the other quotes I got. Moral of the story: If your insurance rates go up, always call for an explanation. You just might find that someone has screwed up massively and is insuring the wrong thing.
We spent a good deal of time in small group discussing the many ways insurance has saved people’s bacon. One man told of his home burning down. He was devastated, of course, but because they had good insurance they were able to rebuild and refurnish without having to cover any of it out of pocket. Certainly he regrets the loss of photos and family heirlooms, but he said that if he’d had to pay for any of the damage and loss, it would easily have run into the hundreds of thousands of dollars and created a hole he could never dig out of.
We also talked about how unwise it is, when you’re having financial trouble, to eliminate or reduce your insurance coverage. It’s tempting to save that money, but the potential losses are not worth any temporary savings you might gain. If you’re already having financial issues, an uncovered illness, car accident, fire, or injury could completely wipe you out. If you have some savings you might be able to consider reducing some insurance coverages, but even then you’re better off finding the money somewhere else in your budget. The things that insurance generally covers are major expenses. You don’t want to save a little bit of money (a couple of hundred) only to put yourself in a position where you could end up owing thousands or millions.
Each week in small group we’ve been invited to cut up any credit cards that we are no longer using. This week one of our members cut up twenty-eight cards! Everything from gas cards, to store cards, to major credit cards. It took quite a while and nearly filled up the jar they keep the pieces in. This couple has pledged to go card free, so this was every card they have. They didn’t keep one for emergencies or anything else. Twenty-eight cards. Aside from wondering how big of a wallet they needed to carry all that, I couldn’t help but wonder why they’d taken out so many. For the sign up bonuses and discounts? For the rewards? Or because they needed them to get through some tough times? They didn’t say and I’m left wondering. I wonder if a lot of people have this many cards, or is this an exception. Whatever the reason, I’m proud of them for cutting them up. I may not be willing to go card free in my own life, but twenty-eight cards is excessive and asking for trouble. I could tell that this couple felt a lot better and they will probably do quite well.
Homework Roundup: This week we were to fill out the insurance recap form. This form gives us a place to list all our insurance polices and the details of each. It also lets us see exactly where any gaps might be in our insurance coverage and gives us a place to record a date by which we intend to fill that gap. We have all of the policies Dave recommends and carry (mostly) more than his recommended limits, except an umbrella policy. I would like to get one at some point but I remain uncertain as to when that might be. I haven’t fully convinced myself of the necessity, so I need to do some more research before I commit.
We were also to make certain that our life insurance is at the level Dave recommends. Our life insurance is well below the ten times your salary that Dave recommends, but we are okay with that. We are no longer that young, we both work, we don’t have any kids, we have a lot in savings, and the house is paid for. We’re almost to the point where we are self-insured. If one of us were to die, the other one would be able to continue working and bring in enough money to support themselves. We keep the life insurance policy so that the money could be used if one of us needed to hire some outside help, or to simply buy some grieving time without having to rush back to work or tap the savings. However, if we had kids or were much younger, or had a lot of debt, we’d carry much more life insurance. I don’t think Dave’s estimate is necessarily wrong, but it’s not a blanket number that applies to everyone.
This is a series of posts about what you will find in Dave Ramsey’s Financial Peace University course. You can find the previous posts here: week one — week two — week three — week four — week five — week six