A Question With a Purpose
Life insurance isn't about picking a number out of thin air. It's about making sure the people you care about can move forward without financial stress. And while everyone's situation is unique, there's a simple and effective way to estimate how much coverage makes sense.
The DIME Framework
This memory-friendly approach helps break the question down into four categories: Debt, Income, Mortgage, and Education. It's easy to remember, and even easier to apply.
- D – Debt: What debts should be paid off?
- I – Income: How many years of income should be replaced?
- M – Mortgage: Do you want your family to stay in the home?
- E – Education: Will someone rely on you for college or long-term care?
1. Debt
Life insurance can be used to eliminate financial burdens like credit cards, student loans, or personal loans — especially those with cosigners. Clearing this out means your loved ones won't be left with your balance sheets.
2. Income
Replacing income helps maintain the everyday lifestyle that might otherwise disappear. A common guideline is 5 to 10 years of replacement, depending on whether your household is single or dual income, and how long it would take dependents to become self-sufficient.
Example: Someone earning $60,000 a year might want between $300,000 and $600,000 in coverage just to account for this section.
3. Mortgage or Housing Costs
A policy large enough to pay off the mortgage — or cover several years of rent — can provide stability during an already difficult time. It’s one of the simplest and most appreciated uses of life insurance funds.
4. Education
From college tuition to special needs care, this category covers future educational goals you’d like to help fund. It could also include covering daycare or early childhood support if a surviving parent would need to return to work.
Bringing It All Together
Once you’ve added up these categories, subtract anything already in place: savings, retirement funds, or coverage from work. The result gives you a solid starting point for how much life insurance might be appropriate — not too little, not excessive, but built around real life.
Fast Estimation Rule
As a quick shortcut, multiplying your annual income by 10 can give a rough estimate for most working adults. It’s not exact, but it offers a starting point you can refine later.
Things That Are Often Overlooked
- Relying entirely on employer-provided coverage — These policies often disappear when you leave the job, and the amounts are usually limited.
- Thinking short-term — A policy that seems large now may not stretch as far 15–20 years down the road, especially with inflation.
- Ignoring stay-at-home partners — They may not generate income, but their role still carries huge financial value that could be expensive to replace.
Take the Pressure Off Perfection
Life insurance doesn’t have to be exact to be effective. It just needs to reflect the responsibilities you’d want handled — whether that’s keeping a roof over someone’s head, covering tuition, or simply giving your family time to breathe and heal.
In most cases, even a modest policy is better than none at all. The key is to plan ahead while it’s affordable, and adjust as your life changes.