Life Insurance: Shopping Frequency And The Ramsey Way

Life insurance is a crucial form of coverage for anyone with a spouse, dependent child, or anyone relying on their income for living expenses. It is recommended that you evaluate your life insurance policy at least once a year or whenever you experience significant life changes, such as getting married, having a baby, changing jobs, or renovating your house. The purpose of life insurance is to replace your income if you die, so it is essential to ensure that your coverage is sufficient to support your loved ones financially. The general rule of thumb is to have a policy worth 10-12 times your annual income, and term life insurance is recommended over whole life insurance as it is more affordable and better suits the temporary nature of this need.

Life insurance is for those with dependents

Life insurance is for those who have people depending on their income, such as a spouse or dependent children. It is a way to protect your loved ones in the event of your untimely death, giving them financial support when they need it most.

The purpose of life insurance is to replace your income if you die, so your family can maintain their standard of living. It is not meant to be an inheritance but rather a safety net for your dependents. This is especially important if you are the main provider for your household, as your income contributes to essential expenses like groceries and utilities.

Dave Ramsey, a finance expert, recommends buying life insurance if you have dependents: "If you have young kids, they're counting on you for the next 15-20 years. Whether your spouse works or not, they're also counting on your income, so don't run the risk of leaving them high and dry." He emphasizes that life insurance is crucial during the years you are raising children and suggests buying a 10-20 year term policy worth 10-12 times your annual income.

Stay-at-home parents should also consider getting life insurance. Their contributions to the household, such as cooking, childcare, and housekeeping, would be costly to replace if something happened to them.

It is important to note that life insurance is not something you need for your entire life. As your wealth builds over time and your children become financially independent, you may no longer require life insurance. At that point, you can consider becoming self-insured, where your annual investment returns can replace your income.

Term life insurance is the only kind worth considering

The primary purpose of life insurance is to replace your income if you die, especially if you have dependents relying on it. Term life insurance is specifically designed for this purpose, providing coverage for a set period, often 10 to 20 years, which is typically sufficient for dependents to become financially independent. This fixed term ensures that you only pay premiums for the duration required, making it a more affordable option.

On the other hand, permanent life insurance policies are significantly more expensive, with premiums up to 10 times higher than term life insurance. This is because they combine life insurance with investment opportunities, allowing you to build savings within the plan. However, these investment options often provide poor returns, and there are far better places to invest your money for higher returns.

Additionally, term life insurance offers the advantage of a locked-in premium. With term life insurance, the premium remains the same throughout the term, providing stability and predictability. In contrast, permanent life insurance policies may have variable premiums that can fluctuate over time, adding uncertainty to your financial planning.

Another benefit of term life insurance is its flexibility. As your life circumstances change, you can adjust your coverage accordingly. For example, if you have a baby or buy a new home, you can evaluate and update your term life insurance policy to ensure your loved ones are adequately protected.

In summary, term life insurance is the only kind worth considering because it is specifically tailored to meet the primary need for life insurance: replacing your income in the event of your death. It is more affordable, offers fixed premiums, and provides the flexibility to adjust your coverage as your life circumstances change. By contrast, permanent life insurance policies are costly, combine insurance with subpar investments, and may have variable premiums, making them a less attractive option.

You should have 10-12 times your annual income in coverage

Life insurance is a crucial form of coverage for anyone with financial dependents, be it a spouse, children, or anyone else who relies on your income for their living expenses. When it comes to the amount of coverage, the general rule of thumb is to opt for a policy that is 10-12 times your annual income. This may seem like a large sum, but it serves a vital purpose – to provide a financial cushion for your loved ones in the event of your death.

Let's break down why this level of coverage is recommended. Firstly, it gives your family the means to maintain their standard of living. The payout can be invested in growth stock mutual funds, which typically offer a 10-12% return. This investment growth can effectively replace your salary for many years, ensuring your family's financial security. Secondly, it allows your family time to grieve and adjust without immediate financial worries. They can use the funds to cover living expenses, pay off debts, and plan for the future.

For example, let's consider an individual earning $50,000 a year. Following the 10-12 times income rule, they should aim for a life insurance policy worth $500,000 to $600,000. This may seem like a substantial amount, but it is designed to replace their income for 10-12 years, providing financial stability for their dependents.

It's important to note that this recommendation is a general guideline and may vary depending on individual circumstances. Factors such as the number of dependents, living expenses, marital status, debt, and proximity to becoming self-insured can influence the exact coverage amount. Additionally, stay-at-home parents should also have their own life insurance policy, as their contributions to the household through childcare, household duties, and other tasks have significant financial value.

In summary, having a life insurance policy that is 10-12 times your annual income provides peace of mind and financial security for your loved ones. It ensures they can maintain their standard of living, cover expenses, and have time to grieve without immediate financial concerns. By following this guideline and tailoring it to your unique situation, you can ensure your family's financial well-being in the unfortunate event of your passing.

Evaluate your life insurance policy at least once a year

As your life changes, your insurance policies should change with it. Evaluating your life insurance policy at least annually can help you avoid being underinsured or overpaying the insurance company hundreds of dollars every year.

• Marriage: If you recently got married, you might want to combine insurance policies with your spouse. This can often lead to savings on car insurance and health insurance. You should also make sure to reevaluate your life insurance needs and add your spouse as a beneficiary.
• Buying a house: If you buy a house, you'll need homeowner's insurance. You may also be able to bundle your auto and homeowner's coverage, which could save you around 5-10% on your premium.
• Family size changes: If your family size has changed, you'll need to update your health insurance, auto insurance, and life insurance policies. If you're having a baby, be sure to contact your health insurer and add your child to your plan within 30 days of their birth. If your teen driver has their own car insurance policy, you may be able to score a multi-car discount. And don't forget to update your life insurance plan to make sure any new additions to your family are listed as beneficiaries.
• Salary changes: Anytime your salary changes, you should evaluate your life insurance policy. It's recommended to have 10-12 times your yearly salary in life insurance, which will provide your family with ample support if something happens to you.
• New job: If you've changed careers, it might be worth talking to your insurance agent to see if you qualify for any discounts on your auto insurance. If your new job comes with a pay raise, remember to adjust your life insurance accordingly.
• Buying a vehicle: When you buy a new vehicle, contact your car insurance company with the make, model, and vehicle identification number (VIN) to see if your insurance rate will change.
• Purchasing expensive items: If you've purchased expensive items such as cameras, computers, sporting equipment, instruments, jewellery, or antiques, you should evaluate your homeowner's or renter's insurance coverage to ensure you have enough protection.
• Renovating your property: Anytime you make renovations or additions that increase the value of your home, you should evaluate your homeowner's insurance policy. Adding safety features, such as gas detectors or smoke alarms, may also lower your insurance rate.
• Retirement: As you approach retirement, evaluate your life insurance policy to decide if you still need it. If you're debt-free, have a substantial net worth, and your children are financially independent, you may no longer need life insurance.

Life insurance is not needed your whole life

Life insurance is not needed for your whole life. While it can be a valuable tool to protect your loved ones from financial hardship in the event of your death, it is not a necessity for everyone. Here are some reasons why you may not need life insurance for your entire life:

Financial Independence

As you progress towards financial independence, you will have fewer people relying on you for their living expenses, and thus, the need for life insurance decreases. The goal is to eventually become self-insured through a combination of emergency savings and retirement accounts, which can provide financial security for yourself and your dependents.

Change in Life Circumstances

Life insurance is intended to provide financial protection for your loved ones, particularly those who depend on your income. However, as your life circumstances change, the need for life insurance may diminish. For example, if you no longer have dependents, such as grown children who are now financially independent, or if you have accumulated sufficient wealth to cover your final expenses, life insurance may no longer be necessary.

Alternative Investments

Life insurance is not the only option for financial planning. There are alternative investment vehicles that can provide better returns and more flexibility. For instance, permanent life insurance policies, which include a cash value component, often offer poor investment returns compared to other investment opportunities. By investing in alternative savings and retirement accounts, you can build wealth and ensure financial security without the need for life insurance.

Term Life Insurance

Term life insurance, as the name suggests, is designed to provide coverage for a specific term or period. It is intended to offer financial protection during the years when your dependents rely on your income, such as when you have young children or a mortgage. Once your children are financially independent and your debts are paid off, the need for life insurance may decrease, and you can choose not to renew the policy at the end of the term.

Retirement Planning

Life insurance is often most crucial during your working years when you have financial dependents and ongoing expenses. However, as you approach retirement and build a substantial nest egg, the need for life insurance may diminish. If you are debt-free, have sufficient retirement savings, and your children are self-sufficient, you may no longer require life insurance to provide financial protection for your family.

In summary, while life insurance can be essential during certain life stages or circumstances, it is not a necessity for your entire life. It is important to regularly evaluate your financial situation, life circumstances, and alternative investment options to determine if and when life insurance remains a crucial component of your financial plan.

Frequently asked questions