How to use the DIME method to calculate your life insurance needs

When it comes to life insurance, many people either drastically underestimate their needs or simply pick an arbitrary number like "10 times my salary." But your family's financial security is too important for guesswork! That's where the DIME method comes in.

DIME is a powerful, personalized approach that helps you calculate precisely how much life insurance coverage you need, ensuring your loved ones are truly protected if you're no longer there. It stands for:

• Debt
• Income
• Mortgage
• Education

Want a little help with the calculations? Use this spreadsheet to follow along with the explanation!

Why ditch the guesswork for the DIME method?

Imagine trying to build a house without a blueprint. You wouldn't know how much wood, nails, or concrete you'd need, right? The DIME method gives you that blueprint for your financial future. It accounts for all the major expenses your family would face, giving you a clear, defendable number that reflects their actual needs.

Let's break down each component and see how you can use DIME to build a robust financial safety net.

1. D is for Debt

Start by listing all your outstanding debts, excluding your mortgage (we'll get to that later).

• Credit card balances: Sum up what you owe on all your cards so that your loved ones aren’t stuck paying for your purchases after your death. If your credit card balance varies, you can make an educated guess on the average debt.
• Car loans: Add the balance remaining for any vehicle(s) your family will want to keep after your death.
• Student loans: US federal student loans are often forgiven after death. This means your family won’t inherit the burden. However, private students loans are rarely forgiven, which means you must count them towards your debt.
• Personal loans: Any other installment loans you might have.
• Other Debts: Medical bills, lines of credit, etc.

Don't forget final expenses! The average cost of a funeral in the US is around $7,848. Including this amount in your life insurance calculations means your family isn’t hit with these unexpected bills during a time of grief.

2. I is for Income Replacement

This is often the largest component and covers the income your family relies on to maintain their lifestyle.

• Calculate your annual take-home pay: What do you bring home after taxes and deductions each year?
• Determine years of support: How many years would your family need to replace your income? This might be until your youngest child graduates high school or college, or until your spouse could retire.

Formula: Annual Take − Home Pay × Number of Years = Income Replacement Total

Because this is often the largest component of your life insurance calculations, we recommend revisiting this section if your coverage amount is higher than you expected. In order to keep premiums affordable, have an honest conversation with your partner. Could they get by with half of your income?

3. M is for Mortgage

Your home is likely your most significant asset and often your largest debt.

• Find your payoff amount: Look at your latest mortgage statement for the exact outstanding balance.

The goal here is to provide enough funds so your family could pay off the mortgage entirely. This removes a massive financial burden, ensuring they can stay in their home without a monthly payment hanging over their heads.

However, mortgages are often shared between multiple breadwinners. If accounting for the full amount of your mortgage drives up your premiums, talk to your partner about the best path forward. You can always agree to leave enough to cover a portion of the mortgage.

4. E is for Education

If you have children, consider their future education costs.

• Estimate future college costs: Research average costs for in-state public universities, out-of-state options, or private schools, depending on your aspirations. As of 2025, the average cost for in-state tuition is around ****$9,750 per year and around $38,421 for a private nonprofit university.
• Consider other education: Are there private elementary of high school tuition costs, trade school expenses, or other educational goals you want to fund?

When using the DIME method, factor in what you realistically want to contribute to each child's education. It’s always important to discuss your plans with your partner. Providing a larger amount for education might result in higher premiums but lead to lower chances of your children having to take on loans.

Putting it all together

We’ve put together a DIME worksheet that will help you make the final calculations.

Your DIME calculation gives you your total ideal coverage. However, you might already have some life insurance (e.g., through your employer) or significant liquid savings your family could use.

Subtract any existing coverage and liquid assets from your DIME total to find out how much additional life insurance you actually need to purchase.

An example: Meet Sarah Miller

Adding everything up with the DIME method

Let's look at Sarah Miller, 40, with one 13-year-old child. She earns $75,000/year. While she has a $5,000 car loan and $100,000 left on her mortgage, she has no credit card debt. Additionally, she wants to leave $50,000 to help with her child’s university costs when the time comes.

• D (Debt): $5,000 (car) + $10,000 (final expenses) = $15,000
• I (Income): $75,000/year × 5 years = $350,000
• M (Mortgage): $100,000
• E (Education): $50,000

Sarah's total DIME need: $15,000 + $350,000 + $100,000 + $50,000 = $515,000

Adjusting for existing cover and savings

That is our starting number. However, Sarah already has a life policy through work that pays out 2x her salary upon her death. That’s $150,000. Additionally, she already has $25,000 saved for university costs.

Her final coverage need: $515,000 - $150,000 (existing cover) - $25,000 (existing savings) = $340,000

Why this matters

The DIME method helps you avoid being underinsured, which could leave your family in a difficult financial situation. It also prevents you from overpaying for unnecessary coverage. By understanding the real costs your family would face, you can make an informed decision and secure peace of mind.

Ready to try it out? Try our DIME worksheet!