With unpredictability standing at every nook and corner of our lives, timely buying a Life Insurance policy can boost your confidence to be prepared for everything. However, getting the right life insurance plan is a great ordeal. You need to research the best policy by comparing premiums and it often takes time. Moreover, you also need to figure out the exact amount of life cover you need. 

Have you ever thought about how much life insurance cover you need? It’s a simple and basic question which a lot of people don’t have an answer to. There are a lot of approaches out there to help you calculate how much life insurance you might need. 

1. Multiply Your Income by 10 or 5 or 20: Now, this isn’t the best option because you aren’t taking any of your needs and liabilities while calculating.

2. Years Until Retirement Method: This is calculated by multiplying your annual salary by the number of years left until retirement. 

The problem with this method is that it ignores financial obligations and doesn’t take the long-term needs of your dependents into account.

A much better alternative is the DIME method for life insurance calculation.

What is the DIME method?

The D.I.M.E (Debt, Income, Mortgage, Education) method is a smart way of calculating exactly how much life insurance coverage would be sufficient for you and your family. Let’s see how:

Debt (D): How much debt would you leave behind? This includes loans, credit card debt and more.

Income (I): Multiply your income by the number of years you want to provide income replacement for your family. 

For example, if your annual income is Rs 5 lakh and it will be sufficient to provide for your family for 10 years then Rs 50 lakh in coverage would be needed.

Mortgage (M): Now, you will want your family to stay in the same beautiful house. Therefore, the outstanding mortgage debt should also be taken into account.

Education (E): Education for your children can be pretty expensive so you need to take that into account as well.

However, if you add it all up, the resulting coverage amount will give you a crazily high premium as well. And what’s the point of saving for the future if you have to sacrifice everything in the present?

Therefore, you need to subtract the total amount from your current net worth (including your investments, bank balance etc) to get the ideal coverage amount.

Calculating Required Life Insurance Cover through the DIME Method

So, let’s look at this with the help of an example for a person earning an annual in-hand salary of Rs 6 lakh:

So, while your total premium amount was Rs 2.3 crore, your adjusted ideal premium amount will be Rs 2 crore.

Also Read: Life Insurance Awareness – The India Story

Conclusion

We always look at getting the lowest premiums while buying an insurance policy. However, the coverage amount is something that should be paid attention to as well. Hence, the D.I.M.E method is the apt way to calculate this coverage amount based on your needs and wants.

Managing your money and finances can be difficult. Learn the art and science of doing that with The 1% Club. Details here

Disclaimer: The above content is for informational purposes only. You should consult a SEBI-registered Insurance Advisor before finalising your financial planning.