Dave Ramsey Says This Type of Insurance Policy Will ‘Provide Your Family Very Little Financial Security’

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Don’t waste money on insurance coverage that leaves your loved ones without the funds they need.

Important points

  • Life insurance is important to financially protect surviving dependents in the event of premature death.
  • Not all types of life insurance offer this security.
  • Dave Ramsey warned that mortgage and credit life insurance policies don’t provide the financial help many families need.

Life insurance offers peace of mind and ensures that your loved ones are not in financial distress should an untimely death occur. But not all policies offer the necessary protection against a money crisis.

In fact, financial guru Dave Ramsey warns that buying a certain type of life insurance could leave families with “very little financial security.” Here’s why.

This cover doesn’t offer enough protection

The types of life insurance that Ramsey warns about are mortgage life and credit life insurance. These types of policies are classified as “decreasing maturity” policies. That’s how they work, according to Ramsey.

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“If you pay off your debt, your death benefit will also go down. Specific examples of this type of insurance are mortgage life insurance and credit life insurance. In these examples, the death benefit is designed to follow the amortization schedule of a mortgage or other personal loan,” explains the Ramsey Solutions blog.

Basically, the insurer agrees to pay the balance of any credit card debt or mortgage debt owed by the deceased after their death. As Ramsey said, “The policies are advertised as a way to pay off debts or pay off your mortgage when you die.”

Why aren’t these guidelines enough?

First, it is impossible to know how much is owed on these loans at the time of death. So there is no way to plan how much the policy will pay out. “You never know how much they’re going to be worth when you die, so they provide very little financial security for your family,” Ramsey said.

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Second, since these policies only pay off the remaining balance of the loan, they do not offer any other type of financial assistance to survivors. Those left behind “may not inherit more than a debt paid off or paid off but no cash in their pockets,” Ramsey warned.

Many people to need additional money to cover funeral expenses or to replace income earned by the deceased before death. While paying off a mortgage or credit card bills can help them a little, if they can no longer get support from the deceased, that won’t help them with final funeral expenses or covering their other bills like childcare or groceries.

Should consumers listen to Ramsey and stay away from it?

Ramsey is right that buying diminishing term life insurance makes little sense for most people. Instead, it is wiser to take out term life insurance.

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Term life insurance pays a death benefit, and policyholders can choose how much that death benefit should be. The policyholder may choose to maintain sufficient coverage so that the payout is sufficient to pay off the debt in full and still leave a lot of money for other things.

So, term life insurance not only ensures that you don’t have any debt left – just like mortgage and loan insurance – it can also provide additional protection. And term life insurance is usually much cheaper than term life insurance.

In that case, listening to Ramsey is definitely a smart move.

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