Protect · 4 min read
How much life insurance do you actually need?
A simple way to turn your debts, income and mortgage into one number, with a worked example.
Most people guess, or take whatever their employer offers. A better answer comes from asking what your family would actually have to pay for if your income stopped. One common way to add it up is called the DIME method: Debt, Income, Mortgage and Education.
The four pieces
- Debt: credit cards, car loans, personal loans, and final expenses like a funeral.
- Income: how many years your family would need your paycheck replaced, times your yearly income.
- Mortgage: whatever is left on the house, so your family can stay in it.
- Education: what you want set aside for your kids’ schooling.
Add those together, then subtract coverage you already have (like a policy through work) and savings your family could use. What’s left is the gap.
A worked example
A household where one parent earns $60,000 a year, with two kids and a house:
| Income: $60,000 × 10 years | $600,000 |
| Mortgage balance | $180,000 |
| Car loan and credit cards | $15,000 |
| College fund for two kids | $40,000 |
| Funeral and final costs | $12,000 |
| Minus: group life through work | −$50,000 |
| Coverage gap | $797,000 |
That number surprises most families. Coverage through work is often one or two times salary, which in this example would cover about a tenth of what’s needed, and it usually ends if you change jobs.
Is that a lot of money?
Not necessarily. Term life insurance, which covers you for a set number of years, is usually the least expensive way to buy a large amount of coverage while your family depends on your income. What it costs depends on your age, health and the length of the term, which is why comparing carriers matters.
You can run your own numbers with the calculator on our life insurance page.