● Money & small business
How much life insurance do I need? A worked example against the 10× and DIME rules
Open enrollment is often when people choose how much life insurance to take through work, and the form usually offers multiples of salary. A better starting point is what your family would actually need. Here's one example, worked through with the sample file of our life insurance needs calculator. Every figure comes from the same model, whose lump sum was checked year by year against a separate search. The family is an example, not an average: use your own numbers.
The family
| Take-home pay of the person insured | $70,000 a year |
| Share the family would still need (that person's own costs stop) | 75% |
| The family's other income (a partner's pay, survivor benefits) | $12,000 a year |
| Years they'd need it (until the youngest is 22) | 18 |
| Inflation / what the payout earns invested | 3% / 5% a year |
| Mortgage / other debts / final expenses | $280,000 / $18,000 / $15,000 |
| Education fund / emergency fund | 2 children × $60,000 / $20,000 |
| Savings they could use / life insurance through work | $45,000 / $140,000 |
What they'd need
| Income they'd be short in the first year ($70,000 × 75% − $12,000) | $40,500 |
| Lump sum that pays it for 18 years, rising 3% a year | $622,149 |
| Mortgage and other debts | $298,000 |
| Final expenses, education and emergency fund | $155,000 |
| Total need | $1,075,149 |
| Minus savings and the cover through work | −$185,000 |
| Life insurance to buy | $890,149 |
The lump sum is smaller than 18 × $40,500 = $729,000 because the money not yet spent stays invested. The family takes $40,500 at the start of the first year, $52,843 in year 10 and $66,940 in year 18, and the balance reaches zero after the last payment. With 3% growth and 5% returns, $622,149 is exactly enough.
The rules of thumb
10 × take-home pay gives $700,000, or a $560,000 gap after the cover through work: $330,149 less than this family needs, mostly because it ignores the mortgage and the education fund. DIME (debts and final expenses + income × years + mortgage + education) gives $1,693,000, a $1,553,000 gap: $662,851 more, because it replaces the whole income rather than the share the family would need, ignores their other income and assumes the money earns nothing. Both can be far off in either direction, because neither looks at the family's actual situation.
What moves the number most
The years the family would need the income:
| Years | Income lump sum | Total need | To buy |
|---|---|---|---|
| 5 | $194,931 | $647,931 | $462,931 |
| 10 | $371,992 | $824,992 | $639,992 |
| 15 | $532,819 | $985,819 | $800,819 |
| 18 | $622,149 | $1,075,149 | $890,149 |
| 25 | $811,593 | $1,264,593 | $1,079,593 |
| 30 | $932,119 | $1,385,119 | $1,200,119 |
The share of income they'd need:
| Share | Shortfall per year | To buy |
|---|---|---|
| 60% | $30,000 | $728,851 |
| 75% | $40,500 | $890,149 |
| 90% | $51,000 | $1,051,447 |
| 100% | $58,000 | $1,158,979 |
The return assumed on the payout matters less: at 3% the gap is $997,000, at 7% it is $805,691. And whether to pay off the mortgage is a choice: leaving it out (the family keeps paying it from the income replaced) brings the gap down to $610,149, but then the monthly payment has to fit inside that income.
Using the number
A gap like this is needed for a fixed number of years, which is what term life insurance covers, and it's usually the cheapest way to do it. Cover through work often ends if you leave the job, so it's worth knowing how much of your need depends on it. Run the numbers for each earner separately: a parent at home also has a cost to replace, in childcare and household work.
The free life insurance calculator is pre-filled with this example. The spreadsheet adds a year-by-year table that shows the lump sum being drawn down to zero over the years you enter. Not financial or insurance advice.