Insurance

Not sure what life insurance you need? Here’s exactly what Dave Ramsey recommends

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Life insurance is too important not to think about it carefully.


Key points

  • Life insurance is an important purchase because surviving family members can count on the death benefit to cover the essentials after an untimely death.
  • Dave Ramsey has some advice on which cover to buy.
  • He recommends a term life insurance policy worth 10 to 12 times the insured’s income.

When purchasing life insurance, it is important to obtain sufficient coverage to provide the protection that surviving loved ones need. But it can be complicated to figure out exactly how to do this.

For consumers struggling to figure out which policy to buy, financial expert Dave Ramsey has detailed the details on the types of insurance most people should buy. Here’s what Ramsey had to say.

Life insurance recommendations

Ramsey gave details of the type of life insurance he recommends, the term he thinks is best and the amount of death benefit he thinks most people need.

“We can’t say it enough – we recommend getting term life insurance that lasts 15 to 20 years and covers 10 to 12 times your income,” Ramsey said.

Term life insurance is an alternative to whole life insurance. It is in effect for a limited number of years while whole life policies are in effect indefinitely as long as the policy holder continues to pay the insurance premiums. While coverage terms can typically range from 10 years to 30 years or more, Ramsey specifically suggests a policy that offers coverage for 15 to 20 years.

And Ramsey’s advice on choosing a policy that covers 10 to 12 times a policyholder’s income refers specifically to the death benefit. This is the amount paid to beneficiaries when the insured dies during the term of coverage. So, for example, someone making $50,000 a year would buy between $500,000 and $600,000 of coverage

Is Ramsey right?

Ramsey is absolutely right that term life insurance is the best option for most people. Whole life insurance is much more expensive, both because it provides indefinite coverage and because it has an investment component. But most people don’t need indefinite coverage, and whole life policies aren’t usually a great investment because the returns they offer are lower than many other alternatives.

However, the duration and amount of appropriate coverage will vary depending on the specifics of each person’s situation. Generally, the best way to decide how long coverage will last is to determine how long it will last until no one is dependent on the insured person’s income. So, for example, it may be a good idea to keep life insurance until the children go to college and until retirement, when no income would be received anyway.

And while 10 to 12 times income is a usual recommendation for the death benefit amount, it may be more accurate to use a formula called the DIME formula. By following this formula, a policyholder would purchase sufficient coverage to:

  • Repay outstanding debt (D)
  • Replace income for desired number of years (I)
  • Repay outstanding mortgage balance (M)
  • Pay the cost of raising children (E)

While it’s a bit more difficult to use this formula than just buying Ramsey’s recommended amount of coverage, his figure isn’t as accurate and could lead to a lack of coverage if there are a lot of children. to educate, or if a person has a lot of debt.

In general, though, Ramsey has great advice on life insurance, and following his advice can make sense for those who really need a simple approach to deciding how much coverage to buy.

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