Last week a friend of mine from college asked me to calculate premium rates for Long Term Care insurance for her and her husband at age 60. She says that she is waiting until then to get Long Term Care insurance because, “That’s what Dave Ramsey says.”
Even though I feel that Dave Ramsey, Suze Ormund, and most of those TV financial planners tend to be nasty and sarcastic, I must admit that their plans will work, provided you do not pick and choose which part of the plan you want to follow and which you do not.
Most of them pooh-pooh whole life insurance. In the video clip above, Dave Ramsey says it is a rip-off. According to him, the only type of insurance you need to buy is 15-20 year term insurance. In the video above, Dave Ramsey sarcastically explains that in 20 years the children will be grown, the mortgage paid off and there will be $700,000 in your 401k for your wife to struggle on with.
Unfortunately, his advice is conditioned on you doing everything that he says. It assumes that you have a 15 year mortgage rather than a 30 year mortgage. It also assumes that you have a 401k at work that you can contribute 15% of your income to on a pre-tax basis.
Dave Ramsey suggests that you use a “Rule of Thumb” when calculating how much life insurance to buy rather than spending the time to be exact. He also assumes that your widow will be able to find an investment that will pay her 10% interest if you die during a market like the one we have now. Currently, your widow would be lucky to find a CD that would pay her 4% on her money. A 10% return on money is possible but only if your wife is willing to expose the life insurance to the risk of loss.
Dave Ramsey is a bit out of touch with the average American. He assumes that after 20 years, you will have $700,000 in your 401k. The truth is that the average American retires with about $ 70,000.
LONG TERM CARE INSURANCE
I also have a slight disagreement with Dave Ramsey about Long Term Care insurance. I would agree with him that it is necessary during retirement if you have any assets to speak of that would keep you from qualifying for Medicaid.
I would, however, disagree with him on the most opportune time to get LTCI. I calculated the rates for my friend both at age 60 and 55. A minimal plan for Home Health Care was about $ 20 a month less expensive if they got it now rather than waiting until they were 60.
The difference was magnified when I calculated the rates for a minimal, comprehensive LTCI that would cover their costs for Home Health Care, Assisted Living and Nursing Home facilities. The cost of waiting until they were 60 was over $ 60 per month.
My final opinion about the advice from Dave Ramsey is that much of what he has to say is good information. If you are able to follow his advice from the time your first child is born for at least 20 years, it is even wise counsel.
What concerns me is that Dave Ramsey was not on TV when our children were born. At that time, 401k plans and ERISA were still new. When we thought of “Retirement Plans” we still thought that our companies would take care of that for us.
When my children were born, it was still possible to find a CD at a bank that would pay 10%. The majority of mortgages were for a term of 30 years and it was just assumed that children would happily absorb the cost and responsibility of caring for a parent whose body was starting to shut down.
I guess the counsel I am trying to give is that Dave Ramsey’s system will work but only if you work the entire system. The advice he is giving is wonderful for Millennials (with the exception of his “Rule of Thumb.”) Unfortunately, it is not always applicable for Baby Boomers who have not already been frugal with their assets while people like Dave Ramsey and Suze Ormund were growing up with us.