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- [00:00]
Dave Ramsey
Foreign. This episode is brought to you by SmartVestor. Connect with an investing pro near you.
- [00:09]
Rachel Cruze
At RamseySolutions.com SmartVestor Today's question comes from Drew in Pennsylvania. My wife and I are 35 years old with no children yet. We are on Baby Step 7 and have $750,000 in retirement and a half a million dollar home with a balance owed of 250,000. Okay, so you're not on baby step seven. Hear you talk about having enough life insurance to replace our income. But my current income is 375,000 and my wife's is 100,000 with no debt. Is it really necessary to have insurance in place before we have children? Well, again, life insurance is there to replace your income. And you guys are living, I don't know, lifestyle wise. I mean, you're, you know, close to half a million making that per year. And so I would consider you self insured once the home is. If the home is paid off, that feels self insured to me. But if something were to happen to you and your wife was making 100 grand, could, would she be okay with the mortgage? Could she pay all of that and be self sufficient? So I. No. Yeah, so I like the idea of still having 10 to 12 times your annual income for a buffer. And if you guys are both healthy at 35, when Winston, I just redid our life insurance probably two years ago and we did term life with Xander. And it's just so inexpensive that a part of me is like, just do it now. And then once the house is paid off, then you guys can have that discussion. But it's so inexpensive. Yeah, I, I would definitely still keep it because again, if something happened to you, your wife makes a hundred grand, you know, how, what, what's that stress going to be for her of having to still make that mortgage payment every month?
- [01:52]
Dave Ramsey
Yeah. There's less of a burden on you guys than if you had children and your wife did not have a wonderful career that she has. Okay. But if something happens to you, she's in a pinch right now. That's a lot of house for 100k. And so, yeah, you need to be carrying some on you. Now, if you want to do a different formula than the typical. The typical formula I recommend, and Rachel just quoted it, is 10 to 12 times your income and insurance. Now, the reason for that, let's just back up. Let's pretend someone else called in. They said, okay, I make $80,000 a year. So 10 to 12 times would be 800,000 to a million. Dollars, which on a 35 year old is the cost of a pizza. If you don't smoke and you're not fat, okay? It's simple. Obesity and smoking are kill your rates, all right? And so if you're in good decent shape and you don't smoke, and those are both things you can control, by the way. Hello. And so you know, now you get good rates and it's very inexpensive to have a million dollars. Now if you got a million dollars and you die just for general, this is why we have this formula. In other words, your wife is left with two little kids and they count on your $80,000 to eat with and you get a million, she gets a million dollar check when you die. You put that in good mutual funds and let's say just for easy numbers, it makes 10%. 10% of a million dollars is 100,000 minus taxes. Looks a lot like what you used to make. 800,000 invested, 10%, that'd be 80,000, which is what you used to make. And so it creates that perpetually every year it will send your widow or widower with the little kids what your check used to be. That's why we get the formula now. So if you want to use that idea in this situation and say, well, we don't need $4 million worth of insurance on this guy because she doesn't have to have 400,000, his $375,000 income to eat, she's going to be okay. But let's say she that you guys looked at and said, well, we want to make sure she does have 100,000 to help her to go with her 100,000, that's a $200,000 income to pay this house or you know, I want to leave her enough to get some and enough to pay off the house. So you could say million dollars instead of $4 million right now.
- [04:11]
Rachel Cruze
Because yeah, she'd pay the house off.
- [04:12]
Dave Ramsey
And then she'd write check, pay off the house, put 750 in the bank in a good mutual fund with a good smartvestor pro, not the bank. And now you're making $75,000 a year with no house payment. And that's really, really inexpensive again. And so yeah, I would do something. In other words, and here's the other thing. 35 years old with no children yet, I'll just kind of tell you from 35 years of doing this, as soon as you get the life insurance going, the kid's going to come. So you're going to have to re up the you have to double the life insurance anyway, it's come. So go ahead and. Go ahead and get the million with plans to get 3 more million because it's coming. Yeah, you know.