How Much Life Insurance Do You Really Need? A Simple Formula
How Much Life Insurance Do You Really Need? A Simple Formula
“Buy 10 times your salary in life insurance” is the number you’ll see repeated everywhere, and it’s a decent rough starting point — but it ignores your actual debts, how many people depend on your income, and how far along you are in saving for things like your kids’ education. Here’s a more accurate way to land on your real number.
Why the “10x Salary” Rule Falls Short
Two people earning the same $70,000 salary can have wildly different real coverage needs. One might be single with no dependents and a paid-off house. The other might have a mortgage, three kids, a stay-at-home spouse, and zero savings. A flat “10x salary” rule treats them identically, which makes no sense once you actually think about it.
The Formula: DIME
A more accurate approach most financial planners use is often summarized as DIME — an acronym for the four things your coverage should account for:
D — Debt (excluding mortgage, which gets counted separately)
Add up credit cards, car loans, personal loans, and any other debt that wouldn’t disappear if you passed away — your family would still owe it.
I — Income replacement
Multiply your annual income by the number of years your family would need support. A common approach: if you have young kids, estimate until your youngest would turn 18 or finish college — often landing somewhere around 10-20 years of income replacement, depending on their current age.
M — Mortgage
The remaining balance on your mortgage, so your family isn’t forced to sell the home to cover it.
E — Education
A rough estimate of future education costs for your kids, if that’s something you want covered — this varies enormously depending on whether you’re planning for public or private school, in-state or out-of-state college, etc.
Add these four numbers together, then subtract any existing savings, investments, and current life insurance coverage you already have. What’s left is roughly the additional coverage you need.
A Worked Example
Let’s say:
- Debt (non-mortgage): $15,000
- Income replacement: $65,000/year × 15 years = $975,000
- Remaining mortgage: $220,000
- Education estimate for two kids: $80,000
Total: $1,290,000
Now subtract existing savings and coverage:
- Current retirement/savings: $40,000
- Existing employer life insurance: $50,000
Adjusted need: $1,290,000 − $90,000 = roughly $1,200,000 in coverage.
That number might look shocking compared to “10x salary” ($650,000 in this example), but it reflects the actual financial gap your family would face — not just a multiple of your paycheck.
A Few Adjustments Worth Making
If your spouse also earns a meaningful income, you can reduce the “income replacement” portion, since your family wouldn’t lose 100% of household income.
If you’re single with no dependents, your real need might be dramatically smaller than any standard formula suggests — often just enough to cover funeral costs and any debt that wouldn’t be forgiven at death, like private student loans with a cosigner.
If you’re close to retirement with a paid-off mortgage and grown kids, your coverage need typically shrinks significantly compared to someone in their 30s with young children — which is part of why term life insurance, tied to specific years of need, tends to fit better than permanent coverage for most people in this exact situation.
Don’t Forget to Revisit This Number
Life insurance needs aren’t static. A new mortgage, a new child, a paid-off car loan, or a spouse returning to full-time work all shift the math. It’s worth recalculating every few years, or after any major life change, rather than buying a policy once in your 20s and assuming the number still makes sense a decade later.
The Bottom Line
The DIME method gives you a number based on your actual financial picture instead of a generic multiple of your salary. It’ll usually be more accurate — and sometimes noticeably higher — than the rules of thumb you’ll find repeated everywhere else.