“How much life insurance do I need?”

The DIME formula

This formula encourages you to take a more detailed look at your finances. DIME stands for debt, income, mortgage and education, four areas that you should consider when calculating your life insurance needs.

Debt and final expenses: Add up your debts, other than your mortgage, plus an estimate of your funeral expenses.

  • Income: Decide for how many years your family would need support and multiply your annual income by that number. The multiplier might be the number of years before your youngest child graduates from high school. Use this calculator to compute your income replacement needs.
  • Mortgage/Rent: Calculate the amount you need to pay off your mortgage or what amount is sufficient for a ten-year rent fund?
  • Education/ Emergency Fund: Estimate the cost of sending your kids to college. This fund is also for unexpected bills not readily payable from current income. Such things as: Major repairs to home or car, Medical emergencies, etc. Three to six months is usually recommended.

How to find your best number

Follow this general philosophy to find your own target coverage amount: financial obligations minus liquid assets.

1. Calculate obligations: Add your annual salary (times the number of years that you want to replace income) + your mortgage balance + your other debts + future needs such as college and funeral costs. If you’re a stay-at-home parent, include the cost to replace the services that you provide, such as child care.

2. From that, subtract liquid assets such as: savings + existing college funds + current life insurance.