You’re essentially trying to answer one question:
👉 “If I’m gone, how much money does my family need to stay financially secure?”
A clean way to do this is to combine obligations + income replacement – existing resources.
Core DIME Formula
Use this as your base:
Insurance Needed = (Debt + Income Replacement + Mortgage + Education Costs ) – Existing Assets
Step-by-Step Breakdown
1. Debt
Include:
- Credit cards
- Personal loans
- Car loans
👉 Use total outstanding balance.
2. Mortgage
- Use the remaining mortgage balance (not the monthly payment)
- Add extra if you want to cover property taxes/maintenance buffer
3. Education Costs
Estimate:
- Cost per child × number of children
- Include tuition, housing, etc.
Example:
- $25K/year × 4 years × 2 kids = $200K
4. Income Replacement
This is the biggest component.
Use:
👉 Income × Years of Support Needed
Typical ranges:
- 10–15 years (standard)
- Until the youngest child turns 18/22
- Or until spouse’s retirement
Example:
- $100K income × 15 years = $1.5M
5. Subtract Existing Assets
Include:
- Savings
- Investments
- Current life insurance
- Retirement accounts (optional, depending on strategy)
Simple Example
- Debt: $50K
- Mortgage: $400K
- Education: $200K
- Income: $100K × 15 years = $1.5M
- Assets: $250K
👉 Calculation:
($50K + $400K + $200K + $1.5M) – $250K = $1.9M
✅ Suggested insurance: ~$1.9M (round to $2M)
Quick Rule-of-Thumb (if you want speed)
- 10–15× annual income
- mortgage
- education
- – savings
Pro Insight (this is where most people get it wrong)
Most people:
- Underestimate income replacement
- Forget inflation
- Overestimate how long savings will last
A smarter refinement:
👉 Instead of raw multiplication, think in terms of cash flow generation
(e.g., “How much principal is needed to generate income safely?”)
- $1M invested → ~$40K/year (at ~4% withdrawal)
🧩 Optional Advanced Formula (More Accurate)
If you want to think like a financial planner:
Insurance Needed = Lump Sum Required to Generate Annual Income + (One-Time Costs) – Assets
1. “Lump Sum to Generate Income.”
This is:
👉 “How big does the piggy bank need to be so it can give your family money every year?”
Example:
- Family needs $50K/year
- A piggy bank gives ~5% per year
So:
- You need about $1,000,000 in the piggy bank
2. “One-Time Costs”
These are big bills you pay once:
- House (mortgage)
- School (college)
- Debt
Example:
- Mortgage: $300K
- College: $100K
👉 Total = $400K
3. “Assets” (Money You Already Have)
This is your existing piggy banks:
- Savings
- Investments
- Current insurance
Example:
- You already have $200K
🎯 Put it all together
👉 Insurance Needed =
- Big piggy bank ($1,000,000)
- Big bills ($400,000)
– Money you already have ($200,000)
✅ Final Answer:
👉 You need $1.2 million of insurance
🧠 One-line intuition
👉 “Give my family a machine that replaces my income, pays off big bills, and ignores money we already have.”
