Today we’re talking about one of my favorite types of insurance: life insurance. Yes, I have a favorite type. And no, I don’t need more hobbies.
Why life insurance? Well, because I have a life! While some say that’s debatable, I’ve taken up this life insurance thing and it’s fascinating.
Trust me, it’s way better than insuring yourself against alien abduction—yes, that’s a real type of insurance, and no, you don’t need to buy it. But you probably do need life insurance.
In this article, we’re going to talk about what it does, which kind you should get, and how you can combine it with the Baby Steps to become self-insured.
Now, in my 10-plus years working for Ramsey Solutions, I’ve gotten to know Dave pretty well. He loves teaching people to protect themselves with life insurance, and that passion has rubbed off on me.
One thing he’s taught me, and what I teach everyone, is that life insurance only has one job: to replace your income if you die.
I know death talk is an ick for a lot of people, but detailed research has found that it does come to all of us. And if you’ve got anyone depending on your income, this is no time to be squeamish.
You need to know they’ll be okay even if you die when a cow falls through your roof. I know you think this would never happen to you, but there was this one guy years ago in Brazil taken out by a falling cow. No bull.
Another thing Dave’s taught me is that you only need life insurance while you’re building up wealth and wrangling those darling dependents. By paying down debt and building up wealth over time, you’ll become self-insured and if you’re doing it right, they’ll become adults . . . hopefully. . . With their own incomes. . . hopefully. . . Please God . . .
If you’re following the Baby Steps to become debt-free and build retirement accounts, it won’t be long before you’ll have the ability to replace your own income with the annual returns on your investments. Basically, that means the money you invested makes as much as you did, thanks to compound growth.
So Dave only recommends life insurance for that short season while you’re raising ‘em right (usually 10–20 years).
Core Ramsey Teaching: You only need life insurance while you have people depending on your income. Buy a 10–20-year term policy worth 10–12 times your annual income.
Since life insurance is only for the short-term, you should only buy term life insurance. (Hence the name.) And it needs to be level term life. (Level just means the premium stays the same every month.)
Not only is term life the most affordable option, but paying for it ends when you no longer need it, unlike that Paramount Plus subscription you forgot to cancel.
With term, the premium gets locked in when you buy, and stays the same until the term ends. Now I hope—and I’m sure you do too—that you never need to use the insurance, but if anything happens to you during that term, your dependents receive a payout (aka the death benefit).
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Go for a payout worth 10–12 times your annual income. Why 10–12? Well if you invest that payout in growth stock mutual funds, averaging 10–12% growth each year, that allows your beneficiary (aka your loved ones) to replace your income when you’re gone. And while they’ll always miss you, at least they won’t have the added grief of paying the bills.
Dave always says to buy term life ASAP because the premiums only get more expensive as you age.
Also, if you’re married, then both you and your spouse need term life policies. Yes, stay-at-home parents need coverage too. Heck, especially stay-at-home parents. If anything happened to them, you would need a Mary Poppins to fill all the expensive gaps in the household budget they’d leave behind! They’re your private chef, chauffeur, in-house daycare . . . and most importantly: life coach. I would know: My wife’s one of them. Life insurance takes off a lot of pressure!
As great as term life is, it has an evil cousin called whole life insurance. Whole life lacks all that we love in term life—and adds a whole lot that we hate. First, while the coverage lasts your whole life, it can be up to 10 times more expensive (and that premium can vary a whole lot over time).
Maybe worst of all? Whole life mucks up the job of replacing your income by adding in complicated investment options with lousy ROIs. You wouldn’t mix up your home or auto insurance with an investment scheme, would you? Neither would I. So keep your life insurance separate from your investments.
All of that is why Dave and I teach people to avoid whole life. Instead of whole life, just buy term life and invest the huge savings in a tax-advantaged retirement account.
Now you know how life insurance works, and why term is the only way to protect yourself wisely as you work toward becoming self-insured.
And while Dave and I are not an insurance company, if you’re wondering which term life broker we personally rely on, it’s Zander Insurance. They found both me and my wife term life policies at a great rate. And while Dave doesn’t need a life insurance policy because he is a bazillionaire, his wife made him get one through Zander anyway.
