Confused About What Life Insurance You Need? Here's Exactly What Dave Ramsey Recommends

Life insurance is too important not to consider carefully.

When purchasing life insurance, it's important to get sufficient coverage to provide the protection that surviving loved ones need. But it can be complicated to figure out exactly how to do that.

For consumers who are having trouble determining what policy to buy, finance expert Dave Ramsey has spelled out the details on what kinds of insurance most people should purchase. Here's what Ramsey had to say.

Life insurance recommendations

Ramsey gave details on his recommended type of life insurance, the term length he believes is best, and the size of the death benefit he thinks most people need.

"We can never say it enough—we recommend buying term life insurance that’s 15-20 years in length and covers 10–12 times your income," Ramsey said.

Term life insurance is an alternative to whole life insurance. It's in effect for a limited number of years while whole life policies are in effect indefinitely as long as the policyholder continues to pay insurance premiums. While coverage terms can typically range from 10 years to 30 years or more, Ramsey specifically suggests a policy that provides coverage for between 15 and 20 years.

And Ramsey's advice on picking a policy that covers 10 to 12 times a policyholder's income refers specifically to the death benefit. This is the amount that is paid to beneficiaries when the policyholder dies during the coverage term. So, for example, a person who make $50,000 per year would buy between $500,000 and $600,000 in coverage

Is Ramsey right?

Ramsey is absolutely correct that term life insurance is the best option for most people. Whole life insurance is much more expensive, both because it provides indefinite coverage and because there is an investment component to it. But most people do not need indefinite coverage and whole life policies usually aren't a great investment because the returns they provide are lower than many other alternatives.

However, the appropriate coverage term and amount will vary depending on the specifics of each person's situation. Typically, the best way to decide how long coverage should remain in effect is to consider how long it will be until no one relies on the policyholder's income. So, for example, it can be a good idea to maintain life insurance until children go to college and until retirement when no income would be coming in anyway.

And while 10 to 12 times income is a customary recommendation for the size of the death benefit, it can be more exact to use a formula called the DIME formula. By following this formula, a policyholder would purchase enough coverage to:

• Pay off outstanding debt (D)
• Replace income for the desired number of years (I)
• Repay the outstanding mortgage balance (M)
• Pay for the cost of childrens' education (E)

While it's a little more effort to use this formula than to just buy the amount of coverage Ramsey recommends, his figure is not as precise and could result in a coverage shortfall if there are lots of children to educate, or if a person has a lot of debt.

In general, though, Ramsey's got some good advice about life insurance, and following his advice can make sense for those who really need a simple approach to deciding on how much coverage to buy.