Confused about what life insurance you need? Here’s exactly what Dave Ramsey recommends

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Life insurance is too important not to consider carefully.


Key points

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

When buying life insurance, it’s important to get enough coverage to provide the protection your surviving loved ones need. But figuring out exactly how to do this can be tricky.

For consumers having trouble deciding what policy to buy, financial expert Dave Ramsey details what types of insurance most people should buy. Here’s what Ramsay said.

Life Insurance Recommendations

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

“We can never say it enough – we recommend buying term life insurance that lasts 15-20 years and covers 10-12 times your income,” Ramsey said.

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

And Ramsay’s advice on choosing a policy that covers 10 to 12 times the policyholder’s income specifically addresses the death benefit. This is the amount paid to the beneficiaries when the policyholder dies during the term of the cover. So for example, a person making $50,000 a year would buy between $500,000 and $600,000 in 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 unlimited coverage and because it has an investment component to it. But most people don’t need unlimited coverage, and whole life policies aren’t usually a great investment because the returns they provide are lower than many other alternatives.

However, the appropriate term and amount of coverage will vary depending on the specifics of each person’s situation. Usually, the best way to decide how long coverage should remain in effect is to consider how long it will be until no one is relying on the policyholder’s income. So, for example, it might be a good idea to maintain life insurance until the kids go to college and into retirement, when no income will be coming in anyway.

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

  • Pay off outstanding debt (D)
  • Replace the income for the desired number of years (I)
  • Pay off the outstanding mortgage balance (M)
  • Payment of children’s education expenses (E)

Although it is a bit more effort to use this formula than simply buying the amount of coverage that Ramsey recommends, his figure is not as accurate and can lead to a lack of coverage if there are many children to educate or if one has many of the debt.

Overall, though, Ramsey has some good advice on life insurance, and following his advice might make sense for those who really need a simple approach to deciding how much coverage to buy.

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