Life Insurance: Term Life Insurance Specifically
As followers of many of Dave Ramsey's principles, we should be familiar with his thoughts on Life Insurance. If you’re not familiar, these are his blanket thoughts taken directly from ramseysolutions.com: “If anyone depends on your income for their daily needs, you should have life insurance in place with a death benefit worth 10–12 times your annual income. Even though there are many different types of life insurance, the only kind we recommend is term life insurance”.
While this is a great place to start, there are certainly more areas to consider when deciding how much coverage is right for you.
Please also consider reading this article: DO YOU HAVE TERM LIFE INSURANCE?
Considering the DIME Test
The DIME test is an acronym for Debt, Income, Mortgage, and Education. When I mentioned other items to consider when finding an appropriate amount of Term Insurance, this is what I meant.
D - Debt
I - Income (times number of years left with a dependent)
M - Mortgage
E - Education Expense
Case example:
A 30-year-old man and a 28-year-old woman are married and have a 6-year-old
He makes $70,000 per year; she doesn’t work
They have $50,000 of consumer debt left between the two cars
$160,000 left on the mortgage
For education expenses, we blanket estimate $50,000 per child
Therefore, using the DIME test, we see that $50,000 (cars) + $840,000 (70k*12 years) + $160,000 (mortgage) + $50,000 (school cost) = $1,100,000 in needed coverage for the husband and roughly $250,000 to $300,000 for the wife to pay off the house and the cars and save for college since she doesn’t work.
Life insurance is a difficult subject and not a fun topic many want to discuss. However, knowing they have all their bases covered, like debt, mortgage, and college, makes the subject more tolerable when speaking with clients. This helps relieve the stress and discomfort of paying bills or figuring out this piece of the finance puzzle when thinking about a potential loss of life within your family.
Considering Reinvestment of Proceeds
In the case above, you could see how someone making a relatively good income ($70,000 per year) can quickly need massive amounts of coverage.
Another example:
If the breadwinner was making $300,000 per year and their youngest was three years old, suddenly, that calculation would become a needed coverage of over $4,500,000 ($300k*15 years).
While that is still affordable coverage for someone making that amount of money, $4,500,000 is probably not the perfect amount of coverage. First, we need to ensure that the coverage amount always pays for consumer debt, education savings, and mortgage. After that, we must look at reinvestment opportunities for the surplus death benefit.
When speaking about income replacement, once those portions are paid for (the D, M, and E portion of the acronym), the living beneficiary will have very low expenses, meaning they won’t necessarily need to live off $300,000 per year. Being able to invest an amount like $1,500,000 or $2,000,000 in tax-free death benefits will be more than enough for a surviving spouse with no debt, no mortgage, and education fully funded to live on.
The surviving spouse should reinvest the lump sum into the market and allow the money to work for them.
Losing a spouse or other family member is a crippling event, and the stress of finances should never cause grieving to be interrupted.
How to Get Started
If you want to learn more about Term Life insurance, you can ask one of our financial advisors questions. We also have a licensed insurance agent on the team that they can refer you to for Term Life Insurance Policies. He can help answer any questions you have, create a quote, or write a policy for you if needed.
New Thoughts on Term Life Insurance
November 18, 2024
Drew Hodgson
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