Life insurance: how much is enough
Key takeaways
04 · ideas- 10x rule: quick estimate, often too low
- DIME method: more precise, accounts for your situation
- Term life is often the right choice under 50
- Reassess every major life event
Basic level
The essentials · 1 min
Two common rules for calculating life insurance coverage:
10x rule: Coverage = annual income × 10- Earn $70,000/year → get $700,000 in coverage
- Simple, fast, often recommended by insurers
- More precise — accounts for your specific situation
- Usually produces a higher (and more accurate) number
Most financial planners recommend the DIME method as a starting point, then adjusting based on your specific circumstances.
Intermediate level
How it applies · 2 min
DIME calculation example
Profile: $75,000/year income, $25,000 in debts, $280,000 mortgage remaining, 2 kids (college in 10 and 14 years)
| Component | Calculation | Amount |
|---|---|---|
| **D**ebt | All non-mortgage debt | $25,000 |
| **I**ncome | $75,000 × 15 years | $1,125,000 |
| **M**ortgage | Remaining balance | $280,000 |
| **E**ducation | 2 kids × $60,000 | $120,000 |
| **Total** | **$1,550,000** |
10x rule result: $75,000 × 10 = $750,000
The gap: $800,000 — that's why the 10x rule is often insufficient for families with mortgages and children.
Term vs. whole life:- Term life covers a specific period (10, 20, 30 years) at low cost. A healthy 35-year-old pays $30–50/month for $1M in 20-year term coverage.
- Whole life combines insurance with a savings component. Premiums are 5–10× higher. Rarely the right choice — "'buy term, invest the difference' approach" beats it mathematically in almost all scenarios.
When to reassess: Marriage, divorce, new child, home purchase, significant income change, or any time your dependents' needs change materially.
Advanced level
The math, step by step · 1 min
Income replacement: why 15x, not 10x
The 10x rule assumes beneficiaries invest the payout and live off returns. At 5% withdrawal rate, $700,000 generates $35,000/year — half of the original $70,000 income.
At a more conservative 4% withdrawal rate (aligned with the 4% rule):
For $75,000 income at 4% SWR: $75,000 × 25 = $1,875,000 in income replacement alone.
The DIME method's income component (15× income) is a compromise between the aggressive 10× and the full 25× — it accounts for the fact that expenses typically decline as children grow up and the mortgage is paid down.
Inflation adjustment: A $1M policy today is worth ~$670,000 in purchasing power in 20 years at 2% inflation. Consider laddering policies (e.g., $500k 30-year + $500k 20-year) to get more coverage when most needed and reduce premiums as you age and debts decrease.