Many people buy life insurance by guessing at the amount of coverage they need. The result is that they could easily be over-insured or underinsured. The DIME method is one of two popular formulas for calculating the amount of life insurance needed. DIME stands for debt, income, mortgage, and education. Let’s look at an example for a family of four with 2 children.
- Debt = $50,000 (credit cards, loans, household expenses)
- Income over 10 years = $360,000 ($35,000/year)
- Mortgage Balance = $200,000
- Education = $120,000 ($15,000/year/child for a 4-year college education)
- Total = $730,000 in protection needed
With a life insurance policy in the amount of $730,000, if the insured dies during the policy period, the surviving spouse will have enough money to pay off $50,000 in debt, pay off the mortgage, have $3,000 monthly in income for 10 years or more, and have $120,000 saved for their two children to attend college when the time comes. Money that is not needed immediately can be invested to accumulate cash and make the family even more financially secure.