Dave Ramsey says: Eventually, you’ll be become self-insured

Dear Dave,

My wife and I are both 36 years old, and we have two children. Our son is six, and our daughter will be four next month. We’ve been walking through the Baby Steps, and we should have our home paid off sometime next summer. We realized the other day the one thing missing from our financial picture is life insurance. We both work outside the home. She makes $60,000 a year, while I make $80,000 a year. At our age, and in our current situation, do you think we should we get 20-year or 30-year level term life insurance policies?

Clay

Dear Clay,

You guys are doing a great job of getting control of your finances and planning for the future. Speaking of the future, do you plan on having more kids? If you do, you might want to go with 30-year policies. If you’ve decided two are enough, then based on your present situation I think 20-year policies would work out fine.

I recommend folks have 10 to 12 times their annual income in life insurance coverage. That means you’d need between $800,000 and $960,000 in coverage, while your wife needs a policy in the $600,000 to $720,000 range. But let’s take a deeper dive into all this.

Your kids will be in their mid-twenties in 20 years. Ideally, they both should have finished college by that time, or at the very least, be working and living on their own. If you continue to follow my plan, you and your wife will have paid off your home in a few months and be completely debt-free. And, you’ll have been saving 15% of your income for retirement over those 20 years. On average, that alone should give you more than a half-million dollars for retirement.

Do you see where I’m going with this, Clay? Eventually, you two will become self-insured by getting out of debt, staying out of debt and piling up cash. So, if you’ve got $500,000 or more in a retirement fund, no debt and your children are grown and out of the house, even if you or your wife were to die unexpectedly at that point, the other would still be taken care of and in great shape financially.

Keep up the good work!

—Dave

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