How Much Life Insurance Do I Actually Need?
Use the DIME formula to calculate the right amount of life insurance coverage, and understand whether term or whole life is the better choice.
The Simple DIME Formula
Financial planners use a quick framework called the DIME formula to estimate life insurance needs. DIME stands for Debt, Income, Mortgage, and Education. Add up these four numbers and the result is a reasonable starting point for how much coverage to buy.
Debt means all your outstanding debts excluding the mortgage — credit cards, car loans, student loans, personal loans. Income means your annual salary multiplied by the number of years your family would need financial support, typically 10 to 20 years. Mortgage means your current outstanding mortgage balance. Education means the estimated future cost of education for each dependent child.
For a person earning $65,000 per year with two young children, $15,000 in non-mortgage debt, a $280,000 mortgage balance, and anticipating $50,000 per child in education costs, the DIME calculation yields roughly $965,000 to $1.2 million in coverage needs, depending on the income replacement years chosen.
Why Most People Get This Wrong
The most common mistake is buying far too little coverage because a larger policy seems expensive. People often pick a round number like $250,000 or $500,000 without doing the actual math. For a household with a mortgage, young children, and a working spouse who would need to maintain the current lifestyle, $250,000 often covers less than three years of true financial needs.
The second common mistake is over-complicating the decision. Life insurance does not need to match your exact future expenses to the dollar. The DIME formula is an estimate, and a policy that is 20% above or below the calculation is still far better than no coverage or inadequate coverage.
The third mistake is waiting too long. Life insurance premiums rise with age and health status. A 30-year-old in good health pays significantly less for the same coverage than a 45-year-old. Buying earlier locks in lower rates for the policy term.
How Dependents Change the Calculation
A single person with no dependents and no co-signed debts has minimal life insurance needs. The purpose of life insurance is income replacement and debt coverage for people who depend on that income. Without dependents, the primary use case largely disappears.
Each dependent adds to the income replacement requirement. A spouse who does not work or earns significantly less than you needs more income replacement years in the calculation. Young children not only represent education costs but also may need income replacement for 18 years or more until they are financially independent.
Consider also non-financial contributions. A stay-at-home parent provides childcare, household management, and countless other services that would cost real money to replace if that person died. Life insurance on a non-income-earning spouse should reflect the replacement cost of those services, not just income.
Term vs Whole Life: Which One to Choose
Term life insurance provides coverage for a specific period — typically 10, 20, or 30 years. If you die within the term, your beneficiaries receive the death benefit. If you outlive the term, the policy expires with no payout and no cash value. Term insurance is straightforward and significantly cheaper than whole life for the same coverage amount.
Whole life insurance covers you for your entire life and builds cash value over time that you can borrow against. It is also much more expensive — sometimes five to ten times more expensive per dollar of coverage than term insurance.
For most families buying life insurance to protect against the financial impact of dying too soon, term insurance is the more practical choice. The logic is simple: buy a 20- or 30-year term policy that covers the years your dependents are financially vulnerable, and invest the premium difference between term and whole life in a retirement account. By the time the term expires, your children should be financially independent and your retirement savings substantial enough to self-insure.