How much life insurance do you need? Use the DIME calculation.

By Higginbotham on September 21 , 2017

Calculating life insurance

Life insurance isn’t usually a hot topic at social gatherings. After all, nobody really wants to think about death, and we’re all planning to live forever. But…you know what they say about the best laid plans.

Most would agree that it’s wise to be prepared for whatever life may serve up, and part of being prepared is securing adequate life insurance protection.

How much life insurance do you need?

While that answer will vary for every family, a sharp accountant has come up with what’s called the “DIME” method. DIME is an acronym for Debt, Income, Mortgage and Education. Use the DIME formula as a starting point in calculating your life insurance needs.

  • D = Debt. If you were to die tomorrow, how much debt would you leave behind? If you’re not independently wealthy and haven’t prepared with life insurance, all of that debt gets passed on to your family. So your life insurance policy should cover any debt. You’ll also want to include funeral expenses in that debt figure. For example, let’s say you have $20,000 in credit card debt and $20,000 in student loans, and you’re budgeting $10,000 for your funeral. Your total debt is $50,000.
  • I = Income. Your life insurance policy needs to provide a sufficient income for your family to maintain its standard of living until the youngest child turns 18. In this example, let’s assume that your youngest child will graduate in 10 years; so we’ll multiply your annual income by 10. For example, if you make $55,000 per year, you might consider a $550,000 policy.
  • M = Mortgage. If you’re still paying on a mortgage, your life insurance policy should pay off the remaining balance of your mortgage loan. So, if you still owe $100,000 on your home, for example, add that figure to your debt and your income.
  • E = Education. If you have children, do you plan to send them to college? If so, you should budget a minimum of $100,000 per child for a four-year university education at a state school. That includes tuition fees, room and board and books. If you’re thinking of a private university or out-of-state school, get ready to pay a lot more. Financial aid and student loans help, but there’s no guarantee of getting scholarships, and loans can come with high interest rates.

So, let’s take the figures above and consider that you have two children you plan to send to college. Here’s how it adds up:

  • Debt: $50,000
  • Income: $550,000
  • Mortgage: $100,000
  • Education: $200,000
  • DIME = $900,000

According to the DIME formula, your recommended life insurance coverage is $900,000. Of course, each person’s needs are different, so just consider this a baseline analysis and customize your coverage amount as needed. Remember, some insurance is better than none at all.

We may not like to talk about death, but we all understand the importance of planning for the future of our loved ones. Life insurance gives peace of mind, for you and everyone who depends on you. Beyond providing financial security, life insurance can also be used as a tool to fund college tuition or retirement.

If you’d like to learn more about your coverage options, contact Higginbotham's life insurance experts. We represent every major life insurance company and can offer you a wide range of choices.


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Tags: Individual Life & Health


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