QUESTION: Allen on Facebook wants to know how to determine the length of term life insurance. Dave explains.
ANSWER: I buy my term life insurance from Zander Insurance. Jeff Zander is a friend of mine, and I’ve endorsed that company for about a dozen years. They’re a brokerage firm, so they shop among a gazillion different companies and get you the best price anywhere. You can do that at zanderinsurance.com very quickly and easily.
I usually say 15 to 20 years because that’s about how long people are usually going to need the life insurance. Your one-year-old will be 21 in 20 years. Where does that leave you? That leaves them in their last year of college if they’re on schedule to graduate in four years. If you’ve done other things that are financially great and you’ve saved up tons of money and you’ve gotten out of debt during that time, you should be fine with a 20-year. You may want to take out some that’s 20-year and some that’s 30-year as far as level term life insurance. The total should be about 10 times your income, and your wife should have $200,000 to $400,000 on her as a stay-at-home mom as well. If something happens to her, you have to hire Mary Poppins.
QUESTION: Matt in Indiana and his wife are on Baby Step 6, and some close friends and family are starting to notice how well they’re doing with their money. They’re now approaching Matt and his wife for assistance. How can they be a good influence without creating jealousy or resentment? Dave says he can’t.
ANSWER: You can’t because them deciding to be jealous or them deciding to be envious or them deciding to be twerps about you being a success is not something you can control. That’s them deciding that. It is heartbreaking. They’re not jealous or they’re not angry unless they figure out that you’re not going to give them free stuff. When they figure that out, then all of a sudden you’re too big for your britches. You’re snooty. You make too much, and you just think money’s everything. And it’s like, “Hey, I’m not the one who brought it up. You did.”
The reason that you are going to have to accept a level of it is because you can’t control it. All you can do is control your reaction to it. We just have to remember that person really doesn’t understand to the extent they don’t understand, and we have to have a little bit more distance from them—family member, friend, whatever. Others who do understand are usually people who have been there a little bit, honestly. What happens over time is you don’t mean to, but you’re just not going to associate with people who are trashing you. If you’re trashing me, that means I’m going to put some distance between you and me. That means I’m going to change my circle of friends.
As far as whether you actually help them in setting boundaries or not, you have a better call on whether you’re helping them than they do. By giving some people money, you know you’re giving a drunk a drink, and I don’t give people money who won’t live the way I teach because I don’t believe I’m helping them then. Instead, I’m participating in their denial. You can be nice and diplomatic about it, but you deliver that message.
Envy is the spirit of the land. There’s a spirit moving across America. Envy is one of the seven deadly sins, they say. By the way, there is a difference between envy and jealousy. Jealousy is, “I want what you have.” Envy is, “I don’t think I can have what you have, so I don’t want you to have it.” That’s evil.
QUESTION: Gracie in Alabama is a college student, and her dad is paying for everything while she’s in school. She’s working two jobs and going to school full-time. She’s trying to figure out what she should be giving out of her income. Dave says she should tithe on her income, and the income her dad gives her is a gift.
ANSWER: As an evangelical Christian, we are told scripturally to tithe—give a tenth of our income—to our local church. What your dad gives you is not income. That’s a gift. You tithing on his income—he’s already tithed on it. That’s just money he’s given you to go to school with. That isn’t an earned income. You can, if you want to, give some of that. That’s fine.
You probably don’t need to increase your giving, but you can if you want to. I wouldn’t do it out of guilt. There’s nothing spiritually wrong with building up some cash. I think it’s probably a good plan with you being in school to have some cash built up. But if you feel led to give some of it, that’s fine.
QUESTION: Chad on Facebook asks what percentage of your income you should give away to the less fortunate and whether or not you should be out of debt first. Dave says you should always give and explains how he gives.
ANSWER: You always want to be a giver because...giving makes you—when you do it—into a better person. That’s not mushy and corny. It’s just an actual fact, because when you give money away, it reshapes your heart. Better people get more opportunities. Who do you want to give opportunities to? A grouch who’s self-centered, or a person of a generous spirit? You get a generous spirit by being generous. You always want to be a giver.
You could come up with a lot of different things to look at. As an evangelical Christian, I tithe a tenth of my income to my local church before I do anything. Then my other giving over and above that as a Christian is called an offering. The offerings come from surplus, which are after my family is taken care of and after I’ve met my responsibilities. There’s not a certain percentage that you have to do or should do there. That’s up to you to find your way. But I do recommend giving a tenth of your income to your church if you’re a Christian. If you’re a member of another religion, you may have some directive on that. Things above that, you decide what you’re going to do.
You ought to always be spending some, giving some, and investing some—always. As far as what percentage while you’re getting out of debt, I wouldn’t go more than 10% while you’re getting out of debt, with rare exceptions.
QUESTION: Claudia in Florida borrowed money from her parents and paid it back, but the relationship is strained. How can she deal with this? Dave explains why he thinks time may be the best healer.
ANSWER: If you've paid back the money, I guess it's the fact that you paid it back slowly or weirdly that strained the relationship. If they're going to hold a grudge on that, then the relationship is going to stay strained. Generally speaking, what happens is that time begins to heal these things. Now that they've been paid back, over time they'll become more and more forgiving for the fact that you paid late payments or you didn't pay them properly or whatever. But if you paid it back, that's all you can do for the relationship. Past that, it's their choice on when they want to be nice about the fact that they got their money back. Suffice it to say, you've learned your lesson. Borrowing money from your parents—or, for those of you who are parents, loaning money to your kids—would fall under the heading of "stupid." You're asking for this trouble. Don't do that. Ever.
QUESTION: Kelly in New York and her husband have whole life insurance. It's really expensive, and Kelly wants to get rid of it, but what should she be paying for term insurance? Dave gives her some calculations to compare term life with whole life insurance.
ANSWER: You will not find Northwestern's life insurance of any kind to be cheap. Their term insurance is twice as expensive as anyone else's. You're going to find your Northwestern agent to be throwing a fit. They're a classic whole life agent, and they're going to tell you you'll have taxes and all of this stuff, and you're not going to have any taxes. A five-year-old whole life policy has not made a profit. If there's no profit, there are no taxes. Your basis for tax purposes is the total of everything you've paid into this policy.
Five hundred dollars a month is $6,000 a year—for five years. If I take $345 a month for four years, I get $16,560, plus you put over $500 in for a year, which is another $6,000. So you've put $22,000 in. You're going to get $6,000 out. That's a great investment you've got, Kelly. That's what's known as a loss, so you will not have any taxes.
You need to get some term life insurance and cancel this crap as fast as you possibly can.
QUESTION: Rhonda on Twitter asks what kind of insurance she should avoid. Dave has a list ready for her.
ANSWER: In the life insurance world, you should only buy term life insurance. Avoid any kind of insurance that has a savings program built into it. That would be whole life, universal life, variable life—they're all crap. Stay away from them.
I don't buy gimmick insurances like double indemnity for accidental death. You're not double dead if you die by accident. You're just dead, and your family needs the same amount of money either way, whether you die by accident or die of a heart attack.
I don't buy cancer insurance. Your health insurance ought to cover cancer insurance. If it doesn't, you have a crummy health insurance policy.
You need good health insurance, good disability insurance—long-term only. I don't buy short-term disability. That's another gimmick, because you need a good emergency fund to take care of that. Get yourself out of debt. Get the emergency fund in place. Quit blowing all of your money on gimmick insurance. Long-term disability is a yes. Of course, homeowner's or renter's insurance is a yes. Long-term care insurance to cover nursing home stays—if you're 60 or older—is a yes. Obviously, term life insurance is a yes. Auto insurance is a yes.
Watch for your gimmick insurance stuff. Another thing to avoid is return of premium. An insurance company charges you a little extra but gives you all of your premiums back if you don't use the insurance. Well, if you'd just invested that little extra you paid, you'd get all your premiums back whether you used the insurance or not. That's a gimmick as well, so I don't do return of premium, either. Don't save money with insurance companies. It's not the way to live.
QUESTION: John on Twitter asks how to help a friend with his finances even though his friend hasn't asked for help. Dave says John has to convince his friend that he needs help without telling him that he needs help.
ANSWER: You have to talk him into asking you for help. To do that, become bubbly about how good you've done, but don't do it in a bragging way. You just talk about, "Man, I'm feeling so good because I got these debts paid off. For the first time in my life, I'm feeling in control with my money." He's sitting there not doing good and immediately going to ask, "How'd you do that?"
You don't go up and say, "I think you're broke and you're stupid and you shouldn't have bought that car." That's not going to work. Instead, you start telling him about how much debt you've paid off and how it's changed your life. Pretty soon, he's going to say, "How did you do that?"
Don't talk about how dumb he is; talk about how dumb you were. Talk about the time that you did stupid things and you turned it around by not doing stupid things anymore.
QUESTION: Dave explains to Daniel why he has life insurance and why he doesn’t buy whole life insurance.
ANSWER: Daniel, your friend is an idiot. Your family friend is a well-meaning, nice person who’s an idiot. No, I do not have whole life insurance. I can do math. Consequently, I would never buy that crap. It is the worst product sold in the insurance industry. Out of all the possible kinds of insurance, whole life insurance is the worst.
Yes, I do have a large net worth. It’s interesting that you can pay estate taxes if you have money. I do have some life insurance, and I have two reasons for having life insurance, and it’s always term life insurance. It’s all I buy. I buy life insurance because I’m only 50 years old, I’m in great condition physically, I don’t smoke, and I don’t drink so heavily that it causes me to have problems with insurance. I can get a great rate on term life insurance. Given that, it really doesn’t cost very much for me to buy another million dollars of term life insurance. I buy life insurance because of SWI—Sharon wants it. She really doesn’t need it. She’s got plenty. If I die, she’s going to be all right. But she just wants it, and it doesn’t cost that much. She’d rather have that than some other sparkly thing stuck in her ear. That’s it. That’s why I buy some.
I do buy some, and a few people have bought some on me because I am so valuable as a brand to business areas that if I die, it would be a big problem for them. The same thing is true of my company here. That’s called key man insurance, and I have some that is that way as well. But I’m not in need of estate taxes to be paid by life insurance because I have money to pay the estate taxes. It just lowers the size of the estate. Why don’t I insure through that? You don’t think insurance companies make a profit? I’m 50 years old. I’m going to insure for 30 or 40 years? I’m going to buy life insurance? During that time, I could have just saved some money.
I self-insure through things like estate taxes from a mathematical standpoint. I’m not above buying some on emotion like I said just because my wife wants it. But no, I don’t own any whole life insurance. I don’t care how much you’re investing friend of the family guarantees that Dave Ramsey has it. He’s just wrong. I don’t—that simple. I buy term life insurance. That’s it.
QUESTION: Ken in Grand Rapids co-signed for his sister to move into an apartment. She moved out of the apartment last year but ran up a lot of bills, and now Ken is getting the bills and collection notices. Dave suggests paying them and chalking it up to stupid tax.
ANSWER: So the net result of co-signing is that you lose contact with your own sister that you were trying to help. How sad.
Here’s what I would do: I would call the sister and leave her a message that just says, “I love you more than $911. I’m going to pay it. Don’t worry about it. Forget it.” It’s your fault, too. You were stupid for co-signing. It’s stupid tax. Don’t do that kind of stuff again because it will cost you relationships.
Then you have to call the people at the apartment and try to get some kind of a settlement. Whatever you do, get it in writing before you give them any money. I would try to negotiate it. I would say, “I don’t have a lot of money here. My sister sprung this thing on me. I had no idea.” Whine a little bit and then offer them an odd amount. Just make up an odd figure so that it sounds like you really thought it out. Offer them that, and when you get it in writing that they will accept that as settlement in full, then and only then do you send them money in the form of a cashier’s check—no electronic access to your checking account. They will clean you out.
It’s not worth it. It’s $900. Settle it and tell her she’s forgiven and get it out of your life. You’re going to chalk it up to something stupid you did, and never co-sign again.
When you do something stupid with money and it costs you money, we call that stupid tax. Sometimes, you just chalk it up to the tuition of the school of life. You never co-sign—ever—for anything under any circumstances. You have to love someone enough to say no.
QUESTION: Brian wants to know what Dave thinks of getting a personal umbrella insurance policy. He has about $100,000 in assets and Dave if he thinks it’s good. Dave does, as long as certain conditions are met.
ANSWER: It’s one of the best buys in all of insurance and I highly recommend it if you have enough assets to where you are concerned about being a target. If you are sued for a negligent accident, they can go above your insurance. But you can carry a half million dollar policy on your car and your homeowners; if your net worth is only $100,000, then that’s all you need right now.
If you want to buy one, you can. But I would wait until you have a net worth of at least $500,000. For a $1 million rider on your policy, it will cost you about $180. It’s all right to have it, but right now in your case, it may be a little bit of overkill. Nowhere else in the insurance world can you get such a bang for your buck as with umbrella insurance.
QUESTION: Jerry wants to buy his first house, and wants to get a duplex and rent out the other side. A friend of his wants to be that renter, but he’s worried that it could jeopardize their friendship. Dave doesn’t think it’s outrageous to do this, but Jerry needs to be careful.
ANSWER: It can do that. Doing business with friends always puts that friendship at risk. I do business with friends, but the closer the friend, the more I have to lay it on the table by saying we have to do this right, because we are putting our friendship on the line. You have to say if there is any chance you can’t pay, we need to work this out because I can’t afford charity. You need to be extra clear up front about your expectations, but don’t do completely away with it.
QUESTION: Emily just found out about 2 whole life insurance polices that her grandparents took out when she was born. They were just passed on to her and she wanted to switch them to term life insurance. There is $7,000 in loans against them done by Emily’s mom. Is it dishonoring her grandparents’ memory to keep these policies?
ANSWER: Get the right amount of term life insurance in place and then cash out this policy. You are not wasting this policy by cashing it out. Your grandparents have been honored by how you used this; they just got ripped off in the first place. We don’t honor them by continuing the family stupidity.
QUESTION: Kay’s daughter is a college junior who asked Kay how to establish a credit rating. Kay got an insurance newsletter the other day that says insurance rates are based on your FICO score. If she doesn’t borrow money, could that raise her insurance rates?
ANSWER: My FICO score is zero. I work with companies that don’t use just a FICO score. Most of them do use the credit score when they look at you now. I may have to pay a little bit more in insurance, and that might be the cost of not having debt and being broke my entire life. Insurance companies use the FICO score, and it’s going to come back to roost on them.
The problem with this is that people like me who are debt free and don’t borrow money are excellent insurance risks. The chances of me filing an insurance claim are very slim because I just fix it if it breaks. Are you going to tag me because I don’t borrow money? They’ll get slapped around by this before it’s all over.
There is evidence that suggests people with good credit are good insurance risks because they take care of their cars or have a tendency to have money. But that’s not because they have good credit. Your daughter might pay a little bit more in insurance if she avoids debt, but that doesn’t mean she should run out and get a credit card to establish credit. The only way you can get a high credit bureau score is to borrow money.
QUESTION: Ted’s father-in-law is 64 and has a heart condition. They are going to talk to him about long-term care insurance, but they know he’s a procrastinator who won’t do it. Can his family take out the insurance on him? As long as Daddy does one thing, says Dave.
ANSWER: As long as he’ll sign for it. You can’t insure anyone for anything without the signature. The insured will have to sign the document, but you can definitely do that. You ought to do that, because as he gets older, it will be hard for him to get it. We can’t predict how he will go, but assuming that it is the heart is dangerous, because it could be a stroke or Alzheimer’s disease and have a longer stay. Nursing homes can run as much as $50,000 a year, which can crack and scramble a nest egg in a hearbeat. Buy it and make him sign it.
QUESTION: Pablo is on Dave’s plan. He wants to know Dave’s stance on tithing when you are on Baby Step 2. They make $115,000 a year but stopped tithing in January, and he doesn’t like it.
ANSWER: Tithing means first fruits; giving off the top before you do anything. From a Christian perspective, you have to look at a couple of things when asking about the tithe. First, it’s not about what you or I think of it, it’s what God thinks of it. What is He asking you to do? It’s not a salvation issue either. If you don’t do it, the world won’t come to an end. This is your Heavenly Father, who is crazy about you, saying this is the best way to live your life, by giving. God has us give because He’s a giver, and we’re made in His image. The goal of this is to make us more in His image each day. We’re more attuned to our spiritual DNA when we are giving. Don’t give out of a performance-based or legal-based mindset, or because God will give back to you. Your life is simply better when you give, and you should give.
ANSWER: Gap insurance means the car was not worth as much as was owed on it and the insurance company will only cover what the car is worth. The car must have been worth $3,000 less than what you owed, and that’s the gap in your insurance coverage. Since there’s no car anymore, they’re calling that money due immediately.
Just pay this off as fast as you can. If you took an extra job, you could pay this off in a couple of months. Don’t panic – they’ll work with you, especially after you send them that first $1,000 check.
QUESTION: Leanne asks Dave for life insurance recommendations for her 19-year-old son who lives at home.
ANSWER: He has no need for life insurance except to bury him, which he probably gets in his health insurance at work. Young single people with no liabilities and no one who leans on them don’t really have a need for life insurance. He should be investing and saving and stay out of debt. Then, once he gets a wife and kids, get term life insurance equal to 10 times his income.