Dave Ramsey Says Life Insurance Has One Job. Here's What It Is

Anyone buying life insurance should consider this to purchase the right policy.

When buying life insurance, there are multiple different policy options out there that consumers will need to decide between. They will also need to determine how much coverage to buy so they can decide how large the death benefit needs to be.

It can be complicated to pick between different kinds of insurance, such as term life or whole life. And setting the amount of the death benefit is a complex process as well. The good news is, finance expert Dave Ramsey has an important piece of advice about life insurance that can simplify efforts to get covered.

Ramsey says this should be the focus when buying life insurance

Ramsey said the key thing to think about when buying life insurance is to stay focused on the underlying purpose of the policy or the ways in which life insurance can help. And there's really only one goal of getting covered, according to the finance guru.

"Life insurance has one job, and one job only: to replace your income when you're gone," Ramsey explained. "That's it."

By clearly defining the "job" of a life insurance policy, Ramsey can help consumers both decide on a policy type and determine the amount of coverage they should purchase.

How does this advice help consumers decide on a policy?

Ramsey's advice to would-be life insurance policyholders is important because it clarifies what insurance is and is not.

Whole life insurance, for example, doesn't just replace income for the policyholder. The premiums are pretty high for whole life policies because they are sold as investments that acquire a cash value. They also offer lifetime coverage.

The problem with these policies is that life insurance isn't meant to be an investment and it isn't a very good one, since whole life policies usually come with more fees and lower returns than most other investments do. And most people don't earn an income forever, so they don't need lifetime coverage.

This is why Ramsey recommends term life policies rather than whole life coverage. These policies cost far less and they fulfill their one role very well -- they replace income for a set period of time when it is needed.

Ramsey's advice also clarifies how much term life coverage to buy -- enough to replace the policyholder's income. He suggests getting a policy equal to 10 to 12 times what the policyholder is earning, which is a simple and effective way to estimate an appropriate coverage amount.

There are also other approaches that take debt payoff and children's educational costs into account, but the main purpose of these formulas is also to make sure loved ones don't suffer without the income the deceased would have brought in.

Ultimately, consumers who focus on the underlying goal of life insurance as a method of income replacement don't have to struggle to decide what kind of insurance to get or how much. As long as a policy accomplishes this "one job" and does so at an affordable premium, the policy is likely a good one that will meet their needs.