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Maurie Backman
Image source: Getty Images
Maybe you're the primary breadwinner in your family, and your spouse and children rely on you for income. Or maybe you're a caregiver for your aging parents who would need expensive home care if something were to happen to you.
If there are people in your life who depend on you financially, then it's a good idea to purchase life insurance. But if you're going to take that step, the last thing you should do is throw your money away or leave your family without enough coverage.
To that end, financial expert Dave Ramsey has some key advice about buying life insurance. Here are a few mistakes he wants people to avoid at all costs.
It can be tricky to calculate how much insurance you need and to be clear, there's no set formula. Some people like to replace a certain amount of income and leave their beneficiaries with enough money to pay off joint debts, like a mortgage. But there are other formulas you can use to determine how much coverage you need.
No matter what figure you land on, though, don't leave your loved ones with too stingy a benefit. If you do, your policy won't achieve the purpose of giving them the gift of financial protection.
Ramsey suggests procuring coverage to replace 10 to 12 times your income at a minimum. However, you may want to add to that to cover things like paying for your kids' education.
Whole life insurance accumulates a cash value, whereas term life insurance does not. A whole life policy will also cover you for the rest of your life, whereas a term life policy will only provide coverage for a limited period.
Despite that, Ramsey thinks whole life insurance is a bad idea for one big reason -- its cost. Whole life insurance can be prohibitively expensive, costing double or triple what a term life policy costs (or more). And while it's true that you get the benefit of a cash value, the reality is that if you're looking for a way to grow some wealth for your family, opening a brokerage account and investing your extra money is probably a better and more cost-effective way to do it.
Ramsey advocates term life insurance, but he cautions against buying a policy with too short a term -- say, only getting 10 years of coverage. If you have young kids, for example, a 20-year policy is probably more appropriate. And if you want to make sure your spouse is covered until they can file for Social Security, you might choose a 30-year term.
Remember, you might think you're making a smart choice by purchasing a 10-year term life policy and then applying for a new policy once it runs out. But at that point, it may be harder to get coverage, or at an affordable rate, if you're older and have more health issues. And so Ramsey suggests setting your family up with adequate coverage from the start.
Buying life insurance is a wise decision when you have people in your life who stand to get hurt financially in the event of your untimely passing. Just make sure to avoid these mistakes along the way.
