As we discussed in previous articles on this same topic, the rule of thumb you need to remember as an individual is that you can get up to 30 times your annual income in life insurance.
That means if you’re earning $100,000 you can qualify for up to $3 million of life insurance.
While that may seem like a lot, it adds up quickly when you are using the DIME method to determine your life insurance needs.
Read about the full DIME method of determining how much life insurance you need here.
D – Debt (this article)
I – Income replacement
M – Mortgage expenses
E – Education
There are two broad areas of debt to plan for when calculating your needs for life insurance:
- Total current debt to be paid off, such as:
- Credit cards
- Personal loans
- Student loans
- Auto loans
- Final expenses
- Funding your ongoing spending needs. Your calculation for life insurance also needs to consider covering any ongoing expenses after your death, especially if you have a family.
Note that the DIME method separates out mortgage expenses (M) from all other expenses (D).
Another method you may read about is the Rule of 10, which simply says you purchase 10 times your annual salary in life insurance.
If you are making $100,000 then you would buy $1 million in life insurance.
The problem with this approach is that it does not allow for unique or special situations such as unusually high ongoing expenses or large debt for a primary or second home or other large purchases which carry debt.
The DIME method is one of several popular methods but we like it the best because it is a more exact approach to determining what must be covered by life insurance.