Multiply Your Income by 10

Or by 5. Or by 17. This rule of thumb is hard to pin down. We’ve seen many numbers attached to it. And this method likely won’t help you pin down an appropriate amount of life insurance. It’s better to look at your total needs and subtract the assets your family could use if you pass away.

If you want your life insurance policy to help pay for your child’s college tuition and other related expenses, multiplying your income by 10 may not be enough. For instance, if you make $90,000 a year and have two children, your total life insurance need would be $1.1 million with this method.

This equation may offer a simple strategy to determine need, but doesn’t account for other expenses, assets or unique situations. A life insurance calculator will offer you a more accurate representation of your needs.

The DIME Method

DIME stands for debt, income, mortgage and education. The method has you add up these amounts:

• Debt. How much debt would you leave to other people? This could include credit card debt and student loans that aren’t forgiven at death.
• Income. Multiply your income by the number of years you want to provide income replacement for your family. Some sites advise using the number of years until your youngest child turns 18, but we all know that kids often need financial help longer than that.
• Mortgage. Add your mortgage balance to your running total.
• Education. Add an amount that covers tuition, room and board for each of your children who will go to college. Private four-year college costs an average of about $29,000 a year for tuition, fees and room and board, according to the U.S. Department of Education.The DIME method is a good start for calculating a life insurance need, but it ignores existing financial resources that your family might tap for expenses. By itself, it could leave you over-insured.

Factors to Consider When Buying Life Insurance

• Type of coverage. The two overarching types of life insurance are term life and permanent life. There are multiple types of permanent life insurance policies, including whole life and universal life. You’ll need to decide if you want a term life policy, which is more affordable, or permanent life, which can last for the duration of your life. Permanent life often also has a cash value component, and you can tap into this money while you’re alive.
• Life insurance riders. Life insurance riders let you customize a policy with additional features or coverage. The available riders will vary by company and policy.