When Dave Ramsey talks about taking care of the basics, housing, food, utilities and such, he hits right at the core of what life insurance is all about. Life insurance isn’t about enriching those left behind. It’s about making sure they can live on without losing ground, maintaining dignity.
While there are those of us who would love to somehow leave our families wealthier than we found them if death comes prematurely, life insurance has always been about replacing loss and not creating wealth where there wasn’t any. Financial justification is the industry term. It hasn’t always been around and we get a fair number of calls from people who still remember the good old days when you could have as much insurance as you could afford.
That led to insane decisions by life insurance companies to allow people making, say, $10,000 a year to take out a policy for $1,000,000 or more. This was clearly not for income replacement, but rather for the purpose of changing the financial dynamics of a family. Now please understand that I am not saying that people who are poor should stay that way, but if insurance companies don’t operate in a prudent and yes, profitable manner, they won’t be around to fulfill their mission.
So what is reasonable? As a base a person should figure out what it takes to keep their family from having to move, whether that means paying off a house or making sure they have rent money for as long as they need it. You should have an idea what food and utilities cost and make sure your family is provided those basics for as long as they need it.
Suze Orman would say that you need to have 20 times your annual income. Truth is that she doesn’t have a lot of budget concerns. A more realistic approach is to start with those basic expenses and look at different term insurance options. Find those amounts and term lengths that fit within your budget and then have an earnest talk with your spouse about what is more important. If you think about it, within a given budget you might be able to get $1,000,000 of 10 year term or $500,000 of 20 year term or $250,000 of 30 year term. The most important input on that decision really has to come from the spouse that would be the beneficiary. It could be that having less insurance but knowing that it is guaranteed for a longer period is exactly the right fit. It could be that having 5 times your annual income stays in force where 20 times wouldn’t.
If we’re talking about the wife as the surviving spouse, you’ll probably be able come to a reasonable solution soon. Generally women have a better handle on what it takes to keep the ship up right without blowing a budget hole in it. It’s a little trickier with the shoe on the guy’s foot. Some insurance is appropriate and in a lot of cases the wife should have as much or more insurance than the husband. With no children left at home I chose an amount on my wife that would put a roof over my head…..in Belize.
Bottom line. Don’t get pushed by what one guru or another says is the right thing to do. This is important stuff and remember that when it’s all said and done, something within your budget is way better than nothing and way better than too much that falls victim to your budget down the line.