10/12/2004

Advice from Nashville's leading Financial Aid Advisor Dave Ramsey

 
Dave Says
By Dave Ramsey
Author of:
Financial Peace and
The Total Money Makeover

Is three times my salary enough life insurance?

My husband and I are 40 years old and have four children age 18  and younger. I'm a stay-at-home mom and my husband works full time. Our
current life insurance policy is three times his annual salary, which is around $60,000, and I'm concerned that it's not enough. Also, do we need a term insurance policy in addition to his insurance from work?

Joyce
Oklahoma City, Okla.

Dear Joyce,

You're right. You don't have enough life insurance. With you and those four children depending on what he makes, you need at least ten times his income in insurance. You also need $200,000 - $400,000 on you because if something happens to you, your husband will need to hire someone to do all you do for the family at home. He's going to get a rude awakening in finding out how much you really do at home. The stay-at-home mom really does bring tremendous economic value to the household that would have to be replaced if something happened to her. We carry $400,000 on my wife Sharon who has been a stay-at-home mom for 17 years.

I suggest ten times his income in insurance because if something happens to him you could take the $600,000 you would receive from his insurance policy and invest it. If you average a reasonable rate of ten percent return, you would receive $60,000 per year in income. Voila! He's been replaced economically.

I would definitely advise you do a 15-20 year level term insurance policy. This is not the same insurance he gets at work. Usually that insurance is what is called an ART - Annual Renewable Term - and over time it will end up being more expensive than your level term insurance that you purchase outside of work. So I seldom recommend buying the insurance at work unless there are other unusual factors at play. Another reason for not relying solely on the work insurance is, if he has a heart attack and has to quit his job, then he loses his insurance and that health problem makes him uninsurable. Then the two of you have a problem. So I strongly recommend you purchase the bulk of your life insurance, if not all of it, outside of work

Dave

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