Another simple way to calculate how much life insurance you need is to use the DIME method. DIME stands for Debts, Income, Mortgage, and Education (and Everything Else).
To use this method, start by adding up all of your debts (car loans, credit card debt, etc.). Then add up your annual income. Next, estimate how many years your loved ones will need income replacement if something happens to you. Now add your remaining mortgage balance. Finally, add up how much you would like to set aside to help pay for your spouse’s or your children’s education in your absence.
STEP 1: Let’s say your Debt picture looks like this; you have $35,000 or credit card debt, $32,000 left on your Auto Loan, and $23,000 or remaining student loans. So far your need using this method is $35,000+$32,000+$23,000 = $100,000 is your need for Debt.
STEP 2: Now let’s look at your Income. Let’s say your income is $60,000 per year. if you want to provide 10 years’ worth of income replacement, you take your $60,000 x 10 = $600,000 is your need for Income. (our done for you income replacement process will take into account investment earning on this money).
STEP 3: Mortgage considers how much is needed today to pay off your outstanding mortgage on your home(s). For this example, we will consider a remaining mortgage balance of $325,000. $325,000 is your need for the Mortgage portion.
STEP 4: And last but not least, we need to consider how much you would like to provide to offset or pay for the cost of education for a surviving spouse or partner and/or your children. The average tuition fees in 2021-2022 were $10,423 for public, in-state tuition. This does not include room and board or other school-related expenses. If you wanted to cover 4 year of public, in-state tuition for your two children for 4 years each, take $10,423 x 4 x 2 = $83,384 is your need for Education. Here is where you could add in everything else like; final expenses, and creating a short term emergency fund for your loved ones (helpful so they can afford time off work while they are grieving).
STEP 5: Finally, you need to add up these 4 categories to come to your total need: $100,000 + $600,000 + $325,000 + $83,384 = $1,108,384 is your total need using the DIME method.
You can’t keep what you can’t afford and we believe life insurance is something you should keep. Many people significantly overestimate the cost of life insurance. One rule of thumb is to consider spending 1% – 2% of your income on life insurance. This is at least a good gauge to help you with your budget. For example, if you are making $60,000 per year as your income, you could begin with a budget of $600 – $1,200 annually for life insurance. If you’re a 40 year old male you could buy $900,000 of 10 year term and spend less that $600 per year. The length of term insurance will change your premium as well. 10 year term is the most affordable coverage and 30 year term lasts the longest period of time, for term insurance.
**The above rates were verified on January 19, 2023 and were run for the Age & Gender shown, in the State of Colorado at Preferred Plus underwriting (best underwriting) on 10 Year Term. These rates are not a valid offer, you will need to complete a quote to view the initial rate for your situation, and the application process will verify your rate.
We have created several solutions for Personal and Business Insurance to help you determine, organize, apply and buy life insurance in less than 10 minutes. Without needing to talk with an agent. Here is a list of our current personal life insurance solutions:
Build your own plan – this allows you to choose your coverage amount, and instantly see your rates. You can also instantly choose other policy benefits, change benefit amounts, change coverage duration and see the results instantly on your screen. Then you can apply and be approved in minutes!
Income Replacement – this process takes the guesswork out of your insurance plan. If your family or partner has your income continuing they should be able to afford their current lifestyle for the number of years you select. We handle all of the math for you and provide you with a nice, easy-to-understand report so you don’t forget the WHY behind your plan. You can get your report and apply for coverage in 10 minutes or less!
Mortgage Replacement – this is a simple process that is designed to help you pay off your mortgage balance if the unexpected were to happen. We provide you with an easy-to-understand report detailing your mortgage replacement plan. You can get your report and apply for coverage in less than 10 minutes!
Needs Analysis – this is a simple plan that combines the elements listed in this article and allow you to determine your complete need and subtract out any existing, easy to sell or liquidate, assets to offset that need. You can get a detailed report and apply for coverage in less than 10 minutes!