Dave Ramsey Wants You to Avoid These 5 Big Mistakes When Buying Life Insurance

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  • Most people should purchase life insurance, and getting the right coverage is important.
  • Dave Ramsey has offered a warning about five big errors to avoid, including unnecessary add-ons.

Dave Ramsey's advice could help consumers avoid errors they regret.

Life insurance is something most people should buy, but it's also something that many people are confused about purchasing. The good news is, finance expert Dave Ramsey has some advice that could make the process of purchasing coverage easier.

In fact, Ramsey has offered crucial tips to help consumers avoid five common errors when getting a life insurance policy. Here's what they are.

1. Buying too little life insurance

The first and most important mistake Ramsey warns against is buying a policy with an insufficient death benefit.

"You should always buy 10-12 times your income in life insurance coverage," Ramsey said. "Seriously. That small policy you can get through your workplace? It might be one year's worth of coverage -- and that just isn't going to cut it."

Ramsey is absolutely right that buying too little coverage could doom surviving family members to disaster. But while purchasing a policy that provides 10 to 12 times income is a common recommendation and is a good way to estimate coverage, it can be inexact. It's better to use the DIME formula and buy enough insurance to:

  • Pay off your debt
  • Replace your income for as long as your family needs it
  • Pay off your mortgage
  • Cover your kid's education

Following this process can provide a more exact estimate of the amount of coverage needed.

2. Putting off the purchase of a policy for too long

Ramsey also warned against delaying the purchase of insurance.

"If you wait too long to buy life insurance, you leave your family vulnerable if something unexpected happens to you," the Ramsey Solutions blog reads. "Plus, term life insurance premiums generally increase as you get older, so buying sooner rather than later can save you money."

On this one, Ramsey is spot on. Waiting to buy coverage could be a disaster if something happens before a policy is in place. Those who wait could also find themselves unable to get insurance at all if pre-existing conditions develop.

3. Not getting a policy that lasts long enough

Term life insurance is a better option than whole life insurance for most people, as it can be cheaper than whole life insurance and most people don't need permanent protection. But Ramsey warns against choosing a coverage term that's too short.

"What happens if you buy a 10-year policy and have medical issues down the road that raise the cost of your next plan -- or worse, make it so you can't get coverage at all? At that point, the choice to save upfront will end up costing you more in the long run," Ramsey said.

He advises buying coverage until children are grown, and that's a good approach. It's also important to make sure your spouse is no longer dependent on income by the time the coverage term ends.

4. Paying for unnecessary coverage add-ons

Ramsey's next warning relates to buying too many riders. These are coverages that consumers can add to their standard life insurance policy. Some of them are worth it, but many aren't.

"Common riders might include income replacement, waiver of premium, critical illness, and accidental death," Ramsey explained. "They're designed to push our emotional buttons so we buy them out of fear. After all, don't you want to know your family's covered if you die in an accident? Guess what -- your term life policy gives you all the coverage you need, no matter how you pass away."

For most people, this advice is great. Life insurance should protect against untimely death and add-on protections are usually unnecessary.

5. Not regularly reviewing to ensure a policy is still a good fit

Finally, Ramsey said many people make the mistake of not checking whether their coverage needs are still met. He advises reviewing coverage periodically to ensure an appropriate level of protection is still in place even if your life has changed.

All of these warnings are good ones, and consumers should listen to Ramsey to make sure they have the right life insurance coverage at a fair price.

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