Don’t leave an estate with life insurance

Dear Dave: My mom is 71 and debt-free. She's investing $600 a month in a universal life insurance policy worth $250,000 because she wants to leave something behind when she dies. What could she invest this money in, other than the life insurance policy, in order to leave an estate?

- Steve

Dear Steve: This is a good question. You don't use life insurance to leave an estate. It's a bad idea. You leave an estate by saving and investing. The only people who will tell you to use a life insurance policy to leave an estate are life insurance salesmen.

Unless she's ill, I wouldn't keep the policy. Instead, I'd do some long-term investing. It won't take long to get to $250,000 with $7,200 a year. It's the kind of thing that sounds like it'll take forever, but you've got to remember you've got growth and interest in the equation. I wouldn't put money into a life insurance policy at age 71 unless there's someone being left behind who really needs the money - and it doesn't sound like there is in this case.

It would probably take about 13 years for the money to turn into $250,000. Assuming she's healthy, I'd rather do that and bet on her living. That way, she can leave an estate and avoid the expense and rip-off part of the universal life policy.

- Dave

Dear Dave: I have a very large amount of student-loan debt. Where would that go in your Baby Steps plan?

- Jade

Dear Jade: Baby Step 2 is where you pay off all debt except for your house. The fact that it's a large amount of student-loan debt doesn't change anything.

Hopefully, with your very large amount of student-loan debt, you also have a very large income. Believe it or not, there are some really sad situations out there where people have gone $200,000 into debt for a four-year degree in a field where they make $50,000 a year. That kind of thinking and behavior is ridiculous, but it's out there.

Whatever you do, Jade, don't treat this student-loan debt as if it were a mortgage. In other words, don't let it hang around for years and years and years. You've got to get focused and intense about paying off this mess and getting on with your life.

Remember, your income is your largest wealth-building tool. You can't save and plan for the future when all your money is flying out the door to pay back debt.

- Dave

Follow Dave on Twitter at DaveRamsey and on the web at daveramsey.com.