Walking through the DIME method for a family of four, step by step

Say Sam and Taylor, both 36, have two children aged 5 and 8. Sam earns $80,000, Taylor earns $50,000, and they have a mortgage, a few other debts and modest savings. The question they want answered is simple: how much life insurance should Sam carry? The DIME method turns that question into four additions and two subtractions. This post does every one of them on the page, with invented round numbers, so you can repeat it with your own.

DIME stands for debt, income, mortgage and education. The short explanation is in our guide to the The DIME method for sizing life insurance. Here the aim is practice: collect the inputs, add the four letters, subtract what the family already has, round and sanity-check.

Everything below is a hypothetical. The figures are not prices, they ignore taxes, and they leave out Social Security survivor benefits, which can be meaningful and which the Social Security Administration can estimate for your family.

Step 1: Collect the numbers before you calculate

The calculation is easy; collecting the inputs is the work. For Sam and Taylor, a half-hour with statements produces this list.

Use current balances, not the original loan amounts, and use gross pay for the income step, which we will adjust in a moment. If you keep the numbers in a spreadsheet, put the source beside each so you can update the row when it changes.

Step 2: D is for debt

D is every debt other than the mortgage that you would want paid off, so that the surviving parent is not servicing loans from a smaller income.

• Car loan: $15,000
• Credit card: $5,000
• Student loan: $20,000

Total non-mortgage debt: $15,000 + $5,000 + $20,000 = $40,000.

Two judgment calls hide in this step. First, federal student loans are generally discharged at death, which means the $20,000 might disappear on its own, while private loans depend on the lender and a co-signer may stay liable; our guide on what happens to student loans when you die describes the rules. Sam and Taylor include the full amount as a cushion. Second, some people leave out low-interest debt the survivor could easily carry. There is no wrong answer, but it should be a decision, not an accident.

Step 3: I is for income

I is the income the family would miss, multiplied by the number of years it would miss it. The common shortcut is to take the whole salary and multiply by the years until the youngest child reaches 18.

• Sam's gross pay: $80,000
• Years until the younger child is 18: 18 - 5 = 13

Plain version: $80,000 x 13 = $1,040,000.

That is the largest number in the whole calculation, so it deserves a second look. Taylor keeps working. The household would not need to replace all of Sam's pay, because some of it goes to Sam's taxes, Sam's own spending and savings that are no longer needed. Sam and Taylor estimate that the household would actually miss about $60,000 a year, or 75 percent of Sam's gross pay. That is a judgment call, and it should be revisited each time the calculation is run.

Adjusted version: $60,000 x 13 = $780,000.

Notice that the choice moves the answer by $260,000. Keep both numbers visible while you work, because the method's critics usually target this step and its defenders usually fix it. Our guide to income replacement: the 10x rule and better ways covers the alternatives, including a multiple of income and a present-value approach.

Step 4: M is for mortgage

M is the mortgage balance, so the survivors can own the home with no payment, or sell it only by choice.

Mortgage: $240,000.

The usual question is whether to include it in full. A family that would move to a smaller place can reasonably include less. A family that wants stability for the children includes all of it. Sam and Taylor include all of it. Two refinements help: use the current balance, not the original loan, and if the mortgage has a payment you could cover from Taylor's income alone, you might choose to include only part. The cost of being wrong in the direction of too much is a premium you did not need; the cost of being wrong in the other direction is a harder time for the survivor.

Step 5: E is for education

E is the money for the children's education, however the family expects to define it. Sam and Taylor assume $40,000 per child toward a public in-state degree, and no more.

Education: 2 x $40,000 = $80,000.

The usual caveats apply. The figure is the cost the family expects to cover, not the full sticker price. If they already have a college savings account, the balance belongs on the other side of the ledger as an offset, and some families list it under the "savings" line. If either child may need more years or more support, the figure should be higher. Our guide on How much life insurance do I need? has more on the education line.

Step 6: Add the four letters, plus final expenses

Many versions of DIME stop at four letters. Final expenses are real and not covered, so Sam and Taylor add a fifth line of $10,000, which is an assumption.

Check the plain total: $40,000 + $1,040,000 = $1,080,000; plus $240,000 is $1,320,000; plus $80,000 is $1,400,000; plus $10,000 is $1,410,000. Check the adjusted total: $40,000 + $780,000 = $820,000; plus $240,000 is $1,060,000; plus $80,000 is $1,140,000; plus $10,000 is $1,150,000.

This is what the family would need if they started with nothing. They did not.

Step 7: Subtract what they already have

Two things reduce the number: savings the family would really spend, and life insurance already in force.

• Earmarked savings: $30,000
• Sam's group life through work: $80,000
• Existing individual life insurance: $0

Offsets: $30,000 + $80,000 = $110,000.

A few cautions. Savings in retirement accounts may be needed for retirement and can be taxed on withdrawal, so Sam and Taylor leave them out. Group coverage is included, but it typically ends when the job does, so it is a base layer, not a promise; see group life insurance. Confirm that Sam is actually enrolled before subtracting it.

Net need, plain version: $1,410,000 - $110,000 = $1,300,000.

Net need, adjusted version: $1,150,000 - $110,000 = $1,040,000.

Step 8: Round and choose the face amount

A face amount is bought in round figures. Sam and Taylor round the adjusted net need of $1,040,000 up to $1,050,000, and they keep the plain figure of $1,300,000 as the upper bound in case the adjustment proves too optimistic. If they cannot afford the target, they have a menu of ways to trim it:

• Shorten the income horizon, for example by planning around a younger child reaching 18 rather than finishing college.
• Include less of the mortgage.
• Lower the education figure.
• Buy a smaller amount now and revisit when the budget changes.

The right response to a number that is too high is to change an assumption you can name, not to shave the total at random. Our guide to how long a term should you buy: 10, 20 or 30 years covers the next decision: the length of the term. For a 13-year horizon, Sam and Taylor look at a term of 15 or 20 years, because the death benefit should outlast the youngest child's dependence with a cushion.

One more practical point: the face amount and the term are two separate decisions, and a quote needs both. The amount comes from this calculation. The term comes from the horizon: the longest stretch for which the household would still be exposed. For Sam and Taylor that is the 13 years until the younger child is 18, plus a margin, and then the mortgage payoff date. Ask for quotes at two amounts, for example $1,000,000 and $1,250,000, and two terms, so you can see what each step costs before you commit.

Step 9: Test the result by running it forward

A useful check is to ask whether the result would actually work. Suppose Sam died and the family collected a $1,050,000 death benefit. The death benefit is generally income-tax-free to a named beneficiary. The family also has the $110,000 of offsets counted above.

• Total resources: $1,050,000 + $110,000 = $1,160,000
• Pay off the non-mortgage debts: $40,000
• Pay off the mortgage: $240,000
• Set aside education: $80,000
• Set aside final expenses: $10,000
• Left for income: $1,160,000 - $40,000 - $240,000 - $80,000 - $10,000 = $790,000

Spread over 13 years that is $790,000 / 13 = about $60,800 a year, ignoring interest earned and inflation. That matches the $60,000 a year the family said it would miss, so the plan is internally consistent. If the number had come out at $40,000, the plan would be underfunded; if at $90,000, it would be generous.

Two real-world effects pull in opposite directions. Interest earned on the unspent money helps, and inflation erodes it. Sam and Taylor decide the two roughly cancel for a 13-year horizon and move on, but a family with a 25-year horizon should not assume they cancel.

Step 10: Run it for Taylor

A household with two earners is exposed on both sides, so Taylor runs the same sums. The inputs are the same except for pay, and the work of Taylor's household role.

• D: $40,000 (the same debts)
• I: the household would miss about $35,000 a year, 70 percent of Taylor's $50,000, so $35,000 x 13 = $455,000
• M: $240,000
• E: $80,000
• Final expenses: $10,000

Total: $40,000 + $455,000 + $240,000 + $80,000 + $10,000 = $825,000. Offsets: $30,000 of savings and, assuming Taylor's employer provides one times pay, $50,000 of work coverage, for $80,000. Net need: $825,000 - $80,000 = $745,000, which they round to $750,000.

The method misses something here, because Taylor's value includes unpaid work such as childcare and household management, and the cost of replacing it can be substantial. A parent who stays home, or who does most of the caregiving, has a need that the DIME formula underestimates if income alone drives it. Add an estimate of the yearly cost of paid childcare and household help for the years the children need it. Our guide on How much life insurance do I need? discusses it, and you can treat the added figure as a new line in the income step.

Three variations on the same family

A good test of a method is how the answer behaves when one assumption changes. Starting from the adjusted net need of $1,040,000, here are three changes Sam and Taylor might consider.

1. Plan to the end of college, not to age 18. If the younger child will be financially dependent until 22, the horizon is 17 years. The income line becomes $60,000 x 17 = $1,020,000, which is $240,000 higher than before. Net need becomes $1,040,000 + $240,000 = $1,280,000. The education line already covers tuition, so counting both the extra years and the tuition can double-count; decide which one you mean.
2. Include half the mortgage. If Taylor could carry a smaller payment after a move, the mortgage line falls from $240,000 to $120,000, and the net need falls by $120,000 to $920,000.
3. Add a margin for inflation. A flat 10 percent cushion on the net need is $104,000, lifting the figure to $1,144,000. A flat margin is crude, but it is easy to explain and cheaper than discovering the shortfall later.

None of the three is right or wrong. They show that the range of reasonable answers for one family runs from about $920,000 to about $1,280,000 depending on defensible choices, and that quotes at two or three amounts across that range will show how much the choice costs per month. That is more useful than hunting for a single exact figure.

What DIME leaves out

The method is deliberately simple, which means it skips several things:

• Survivor benefits. Social Security pays benefits to eligible spouses and children. They would reduce the need, possibly by a meaningful amount, and the SSA can provide an estimate. Many planners count them; some leave them out as a margin.
• Taxes. The death benefit is generally not income taxable, but money drawn from other accounts may be.
• Inflation. Costs in 13 years will be higher.
• Changes over time. The need falls as the mortgage amortizes and the children grow up. A level term sized for today's need is generous later, and some families respond by laddering several policies.
• Medical and disability risk. DIME addresses death. A disability that stops a paycheck while the person lives is a different risk, covered by different insurance.

Your worksheet

Fill these in with your own figures, in this order.

1. D: the sum of non-mortgage debts you want cleared.
2. I: the yearly income your household would miss x years until your youngest is independent.
3. M: your mortgage balance.
4. E: the education amount you are willing to underwrite per child x number of children.
5. Final expenses: a figure you choose.
6. Add lines 1 to 5.
7. Subtract savings you would spend and life insurance already in force.
8. Round up to a figure you can price. Compare with a plain "ten times income" check.
9. Run the result forward, as in Step 9.
10. Repeat for the other adult.

If you want the arithmetic done for you, the How much life insurance do I need? takes the same inputs. A good next step is to use the result to request quotes, and to rerun the numbers whenever a child is born, a house is bought or sold, or work coverage changes.

Key takeaways

• DIME adds debt, income, mortgage and education, then subtracts savings and existing coverage. For Sam, the adjusted result was a net need of $1,040,000, rounded to $1,050,000.
• The income step drives the answer. Whether the household replaces all of the pay or 75 percent of it moved the total by $260,000 here, so state the assumption explicitly.
• Test the final number by running it forward. If the leftover money, spread over the years, matches the yearly income the family said it would miss, the plan is consistent.
• Both parents need their own calculation. Replacing unpaid caregiving is a real cost the formula does not show unless you add it.
• Treat the result as a starting point for quotes and rerun it when life changes.