Protect · 5 min read
How much life insurance do I need?
Two ways to size cover, the DIME method and human life value, worked through for one family, plus what to subtract.
Pillar: Protect · Reading time: 5 min
In plain words
Life insurance replaces what your family would lose if you died. The question is how big that loss is. "Ten times your income" is a common shortcut, but it ignores your debts, your kids' ages and what you already have.
Two methods give a better answer. DIME adds up the specific bills your family would face. Human life value estimates the income you would have earned for them. Use both, then subtract what you already have. The real need usually sits between the two.
Method 1: DIME
DIME stands for four things your family would need to cover.
- D — Debt. Car loans, credit cards, student loans, personal loans. Add final expenses here too, often $10,000 to $20,000.
- I — Income. The years of income your family would need replaced, multiplied by your take-home or gross income. A common choice is until your youngest child turns 18 or 22.
- M — Mortgage. The balance today, so the family can stay in the home.
- E — Education. What you plan to pay toward each child's schooling after high school.
DIME is concrete and easy to update. Its weak spot: the income piece is often a rough guess.
Method 2: Human life value
Human life value (HLV) asks: what is the economic value of your future earnings to your family?
- Start with your annual income.
- Subtract what you spend on yourself (your share of food, transport, personal costs). What's left is what your family relies on.
- Multiply by the years you expect to keep working.
- Discount that stream back to today's money, because a dollar in 20 years is worth less than a dollar now. Many planners also assume a small raise each year.
HLV often gives a larger number than DIME, especially for younger earners with many working years ahead. It is the ceiling: insurers rarely approve cover far above it.
What to subtract
From either total, take away resources your family would already have:
- existing life insurance (group cover at work, but note it usually ends if you leave the job);
- savings and investments the family could use;
- expected Social Security survivor benefits for young children and a surviving parent caring for them.
Then decide what to keep as a buffer. Many families prefer not to count retirement accounts, so those stay for retirement.
A worked example (illustrative)
Elena, 37, earns $95,000. She and her partner, Marco, have two children, 4 and 7. All figures are illustrative.
DIME
| Item | Amount |
|---|---|
| Debt (car, cards) plus $15,000 final expenses | $40,000 |
| Income: $70,000 take-home for 18 years until the youngest is 22 | $1,260,000 |
| Mortgage balance | $310,000 |
| Education: $60,000 per child | $120,000 |
| DIME total | $1,730,000 |
Human life value
- $95,000 income, less about $25,000 spent on herself = $70,000 a year for the family.
- 28 working years to 65, with 3% raises, discounted at 5%.
- Present value ≈ $1,450,000.
Subtract existing resources
- Group life at work: $190,000.
- Savings outside retirement: $40,000.
- Estimated Social Security survivor benefits (present value, rough): $250,000.
Need after resources: about $1.25 million by DIME, about $970,000 by HLV. Elena settles on $1.1 million, mostly as term cover.
DIME runs higher partly because it doesn't discount future income.
Making the number fit your budget
Once you know the need, the next step is structure.
- Term covers the large, temporary need cheaply.
- Laddering two or three term policies lets the cover fall as the mortgage shrinks and kids grow up.
- Permanent cover may suit a smaller, lifelong part of the need, such as final expenses or a legacy.
If the full amount doesn't fit your budget, buy what you can now. Some cover beats waiting, and premiums rise with age.
Common mistakes
- Counting only work cover. Group life is often one or two times salary, and it usually ends when the job does.
- Forgetting the stay-at-home parent. Childcare and household work cost real money to replace.
- Ignoring inflation and discounting. Big numbers decades out need adjusting both ways.
- Never updating. A new child, a new home or a raise changes the answer. Review every few years.
- Buying the whole need as permanent cover. It can make cover unaffordable, which leads to buying too little.
FAQs
Is ten times income a good rule?
It's a rough start. It can be far too low for a young family with a big mortgage, and too high for someone near retirement with no debt. Running DIME and HLV takes ten minutes and gives a real number.
Should both partners have cover?
Usually, yes. If losing either one would cost the household income or services, both have a need, even if one earns less or nothing.
Do I use gross or take-home pay?
Take-home is closer to what the family actually spends. Gross is simpler and adds a margin for taxes on investment income later. Pick one and be consistent.
Why would an insurer cap my coverage?
Insurers limit cover to a multiple of income, often 20 to 30 times for younger applicants and less with age. The cap reflects human life value.
Does life insurance pay out tax-free?
Under current U.S. federal law, death benefits paid to a beneficiary are generally free of income tax. Estate tax can apply to very large estates if the insured owns the policy.
Related strategies
- Term lengths: matching cover to your mortgage and kids — turn the number into a term ladder.
- Life insurance for stay-at-home parents — sizing cover without a paycheck.
- Buy term and invest the difference: the full picture — choose the structure once you know the size.
Next step
Take the Wealth Strategy Score at /score to see your protection gap alongside the rest of your plan. When you know your number, get a term quote at /quote.
Education only, not personal financial, tax, legal or insurance advice. VeraLife.ai is not a registered investment adviser, broker-dealer or insurance agency. All numbers are illustrative.