Dave Ramsey’s Approach to Life Insurance

If you’ve followed Dave Ramsey for any amount of time, you know he’s not too big on cash value life insurance. In fact, he hates cash value and never recommends it. When it comes to insurance, Dave Ramsey always chooses term life insurance vs. whole life insurance. But what are some mistakes to avoid when deciding on the types of term life to purchase? Here are five mistakes people make when buying term life insurance:

Buying Too Little to Replace Income

Always buy ten to twelve times your income in life insurance coverage. That small policy you’re getting through work, which might be one year’s worth of coverage, isn’t near enough. If you’re the primary source of income in your household, then your spouse and kids need to be taken care of for a long time if something happens to you. Making sure you have plenty of coverage will allow them to live comfortably and maintain their lifestyle until they figure out the next steps in their lives. By investing the insurance proceeds, you can earn a rate of return that replaces your lost earnings and provide security. Just as important, don’t forget to get coverage for both spouses. Even stay-at-home parents need to have term life insurance.

Waiting Too Long to Get Coverage

If you wait too long to buy life insurance, you leave your family vulnerable if something unexpected happens to you. Term life insurance premiums generally increase as you get older, so buying sooner rather than later can save you money. The older you get, the more at risk you are for health issues. That will increase the cost of your life insurance or even make you ineligible to purchase it. Many people think they should wait until they are debt free to buy life insurance, but that’s when your family is the most vulnerable. As you reduce debt and increase savings, you slowly begin to reduce your need for life insurance, as well.

Buying for Too Short of a Term

You might be trying to save a few dollars by choosing shorter term coverage. But what happens if you buy a ten-year policy and you have medical issues ten years from now that raise the cost of your next plan, or worse, make it so you can’t get coverage at all? That will cost you even more in the long run. So how long should you buy for? Dave Ramsey’s general rule of thumb is to buy based on when your kids will be heading off to college and living on their own. In other words, if you plan on having children in the future, then a 30-year plan might make sense for you. If you have a newborn in the house and don’t expect any more children, then a 20-year plan would be a better option.

Buying Too Many Riders

Some people fall for policy riders that increase their premium and pay extra commission to their agents but offer very little value. Some of the more popular riders might include income replacement, waiver of premium, critical illness, and accidental death. You’ll buy because they have an emotional value attached to them, but they have very little actual benefit.

Failing to Occasionally Review Your Life Insurance Policy

It’s always a smart idea to go over your term life insurance policy to make sure you have exactly what you need for your current situation. Your coverage might have been fine 10 years ago, but that doesn’t mean it works for you now. Make sure you have enough insurance to take care of your changing needs. Maybe you had a child, bought a new home, got a raise at work, quit smoking, or had other health improvements. These life-changing events can either help you save money or require additional coverage. Life insurance is a major part of a healthy financial plan. Don’t put off buying term life, or you could find yourself in a major financial hole one day.

— Adapted Dave Ramsey’s blog post, “5 Term Life Insurance Mistakes,” on daveramsey.com (As of October 15, 2019)