Monday, December 22, 2014

Paying the life insurance penalty

Author and radio talk show host Dave Ramsey.
Author and radio talk show host Dave Ramsey.

Dear Dave,

My wife and I live in New York, and we’ve had whole life insurance for several years. There’s a seven percent penalty if we cash out the policies now. If we wait a few years, we won’t have to pay into the premiums anymore. Should we cash out the policies anyway?

-Brian

Dear Brian,

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  • The reason you won’t have to pay into the premiums anymore is because you built up enough savings, and they are not paying you enough on the savings to amount to anything. The amount they should have been paying you versus the way they were ripping you off will buy the life insurance.

    It’s not like you can pay for it because you still have probability of death. As long as there’s a probability of death there’s a cost to life insurance. The only question is whether you’re paying out of your savings account or your checking account. In this case, you’re paying out of savings.

    The seven percent figure is just your surrender charge, so I’d get out of that policy soon. Here’s the problem, Brian. If you die today, do you know what they’ll pay? Face value. They won’t pay face value plus the savings you paid for. In other words, you’ll lose your savings.

    I’d get term life insurance in place by the end of the week. Compare prices on term, because you’ll be surprised at the difference some companies charge for term insurance. Make sure you get good 15- to 20-year level terms policies valued at 10 to 12 times your annual incomes.

    -Dave

    Dave Ramsey is America's trusted voice on money and business. He's authored four New York Times best-selling books: Financial Peace, More Than Enough, The Total Money Makeover and EntreLeadership. His newest book, written with his daughter Rachel Cruze, is titled Smart Money Smart Kids and is out now. The Dave Ramsey Show is heard by more than 6 million listeners each week on more than 500 radio stations. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.

    Dave Ramsey Syndicated Columnist
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