Dave Ramsey

Dear Dave,

Should term life insurance be purchased based on your current earnings or future, projected earnings?

Dan

Dear Dan,

I usually recommend people have 10 to 12 times their current annual income in a good, level term life insurance policy. However, if you have a solid reason to project your income jumping significantly in the near future, there’s nothing wrong with basing your amount of life insurance coverage on that figure—as long as you can afford it.

Now, when I say a solid reason, I’m not talking about having an attitude of, “I’m smart. So, I’m going to make tons more money soon.” That’s ego, not reason. But if you’re in a residency finishing your medical degree, you can realistically look at making $40,000 to $50,000 for another year or two then making the jump to $200,000. That’s the kind of logical thinking and planning I’m talking about. In that scenario, a huge jump in income is almost assured. There’s nothing wrong with going ahead and getting more coverage.

The purpose of life insurance is to take care of your family if something unexpected should happen to you. You don’t want to go nuts and buy too much unnecessarily, but you should have enough to ensure that they’re well taken care of when you’re not around.

—Dave

Dear Dave,

My husband and I are debt-free except for our house. I’ve been having a discussion with a coworker over how much money to allow for fun in your budget. I think $100 for a bottle of wine is okay, but she says something like that is unreasonable. What do you think?

Elizabeth

Dear Elizabeth,

It depends entirely on your financial situation. Paying $100 for a bottle of wine is pretty dumb if you make only $20,000 a year. But what if you make $200,000 a year? Quit worrying and buy the wine! When you have a great income-to-asset ratio — and you’re living debt-free, have control of your money, and are saving and investing for the future — that’s the time to relax and enjoy a few things.


Dave Ramsey

Dave Ramsey is a personal money management expert, popular national radio personality and the author of three New York Times bestsellers.
 
TOWNHALL DAILY: Be the first to read Dave Ramsey column. Sign up today and receive Dave Ramsey and Townhall.com's daily lineup delivered each morning to your inbox.