The formula
DIME: debts + income to replace + mortgage + education − what is already covered
Where it comes from
Life insurance is not there to leave an inheritance but so that whoever depends on you does not have to change their life the day you are gone. Hence the four pieces: the debts that would need clearing, the years of your income that need replacing while the family reorganises, the mortgage outstanding and what the children's education will cost. From that, subtract what savings and existing policies already cover.
How to work it out by hand
- Add up every outstanding debt that would need clearing
- Multiply your net annual income by the years you want to cover
- Add the mortgage outstanding and the expected cost of education
- Subtract the savings and policies you already have
What is worth knowing
DIME is a rule of thumb, not an actuarial calculation: it does not discount inflation, does not count whatever state survivor benefits exist in your country and does not distinguish between a lump sum and an income. The years of income to replace is the variable that dominates: ten is standard, but with young children it makes more sense to cover until they are independent. And it is worth revisiting whenever something big changes, because a shrinking mortgage lowers the cover needed every year.