Method one: income × years
The simplest target is your annual income multiplied by the number of years your family would need it replaced. Ten years is the number most planners start from; five if you have real savings, fifteen if the children are young. On a $60,000 income, ten years is $600,000. It's crude, and that's the point: you can check it in your head, and it's usually within range of a full analysis.
Method two: DIME
DIME stands for debt, income, mortgage, education. Add them up:
- Debt: everything other than the mortgage. Car loans, cards, student loans, a personal loan.
- Income: annual income times the years it should be replaced, as above.
- Mortgage: the remaining balance, so the house is paid off outright.
- Education: what you'd want set aside per child for college or training.
Worked example
| Line | Amount |
|---|---|
| Debt (car loan, cards) | $15,000 |
| Income ($60,000 × 10 years) | $600,000 |
| Mortgage balance | $220,000 |
| Education (two children × $50,000) | $100,000 |
| Gross need | $935,000 |
| Minus savings | −$40,000 |
| Minus coverage through work (2× salary) | −$120,000 |
| Coverage to buy | $775,000 |
Two things stand out. The DIME number is higher than income times years because the mortgage and college are on top of the income, not inside it. And the work coverage brings it down, but only while the job lasts; an adviser will often leave it out of the subtraction, or plan to replace it.
What the adviser adjusts
- Your spouse's income, and whether it would continue.
- Social Security survivor benefits, which can be meaningful while children are young.
- Final expenses: a funeral and last bills, commonly $10,000 to $20,000.
- Whether some of the need is permanent (a dependant who never stops depending) and belongs in a different kind of policy.
None of this requires a medical exam or a commitment. It requires an honest half hour with your numbers, which is what the call is for.