By Dave Ramsey
Q. I’m looking at buying term life insurance. Currently, I’m in medical school doing my last year of residency and making $35,000 a year. Should I base the amount of insurance coverage on what I’m making now or what I’ll make when I’ve finished medical school?
A. In most cases, I advise basing the amount of life insurance coverage on the income you’re earning at the moment. After all, that’s the amount your family is used to living on, right? However, if you’re finishing up your medical degree this year, it’s a virtual certainty you’ll earn lots more in 2014. You could easily go from making $35,000 to $135,000.
I recommend that people buy term life insurance coverage of about 10 to 12 times their annual income. Considering your situation, I’d say you could afford to buy a little potential.
Instead of basing it on your current $35,000 income and buying a policy in the $350,000 to $400,000 range, you might double that amount. It still will be really cheap coverage as long as you’re in decent health. And once you’re making doctor money you can adjust the amount of coverage according to what you actually make.
Q. My wife and I were recently involved in an auto accident, and the insurance company doesn’t want to cover the damage due to a technicality. We both work, so I’d like to find a replacement car while we fight this out with the insurer. However, we only have $7,000 in savings and we don’t want to spend it all. What should we do?
A. You can definitely find your wife a good used car for what you’ve got in the bank. However, leaving yourselves with no savings whatsoever is not a good plan.
I realize no one enjoys driving a beater, but that’s what I’d do right now. Just look at it as a rental car. If you spend $1,500 on a little used something, you will have $5,500 left in your savings account. Just act as your own insurance company for a while. Then, when the big guys pay up, you could just plug it back into your savings account.
Even if they don’t pay, you’ll still have a nice chunk of change sitting there. And it wouldn’t take long to save up enough to upgrade that little hooptie to something nicer and more reliable while still keeping the majority of your savings intact.
Follow Dave Ramsey on Twitter at @DaveRamsey and on the web at daveramsey.com.