The financial DIME analysis

In the previous article on life insurance, we have discussed the need for life insurance in addition to the employer provided group insurance. In this article, we will discuss how to identify the amount to take this additional insurance for. The financial DIME analysis is a good method to calculate the money your family need to continue the current lifestyle, if you are not there to provide for them. While going through the DIME, let's run the numbers taking the example of a family.

Husband and wife, age 40 and 36 with two kids ages 10 and 8. Let's assume husband makes 200k annually and wife makes 100k annually.

What does DIME stand for?

D - Debt
I - Income
M - Mortgage
E - Education

Debt

This is the sum of all the debts the family have. Credit card debt, auto loans, personal loans, and any other things the family owe.

Let's say this debt for the family in our example is 50k.

Note that we are not adding the home mortgage here.

Income

We need to consider two aspects here. The current income and how many years you think your family need this kind of income. If your kids are young, the number of years will be more. If your kids are out of college, then, this number of years will be low. So, take the current income and multiply with the number of years you think you need similar income.

In our example, the youngest kid is 8 years and will be done with college in next 10 years.

The income component of DIME for husband is 200k * 10 i.e., 2M.
The income component of DIME for wife is 100k * 10 i.e., 1M.

Mortgage

What is the pending mortgage on the home for the family. Let's say the family lives in a home with current market value of 600k and the remaining mortgage on the home is 350k. So, the family has 250k equity and 350k debt on the home.

Education

This is the money needed for kid's college education. On an average each kid's education cost 150k in the USA. So, for 2 kids it will be 300k.

Final calculation

DIME number for husband

50K (Debt) + 2M (Income) + 350k (Mortgage) + 300k (Education) i.e., 2.7M.

Now let's calculate the other side of the equation by adding up all the assets. This includes liquid money in the savings and checkin accounts. The equity on the home. The stocks, mutual funds, municipal bonds the family own. Also, the money saved for kids education.

Let's say the family has 100k in their savings and checkin accounts. 350k in stocks, mutual funds, and college savings accounts togethers. Home equity is already calculated as 250k in mortgage section.

100k (Savings) + 350k (Stocks, college savings)+ 250k (home equity) i.e., 700k.

The GAP for husband is 2.7M - 700k i.e., 2M.

Now assume the husband has employer group insurance for 4x of his salary. So, that will be 800k. You can choose to reduce this number from the GAP. Some people don't want to reduce this amount because the group insurance has its limitations. But when considering additional insurance, it might be OK to reduce it. So, in our case, let's reduce it.

GAP for husband comes to 2M- 800k i.e., 1.2M.

DIME number for wife

DIME : 50K (Debt) + 1M (Income) + 350k (Mortgage) + 300k (Education) i.e.., 1.7M.

Assets: 100k (Savings) + 350k (Stocks, college savings)+ 250k (home equity) i.e., 700k.

The GAP for wife is 1.7M - 700k i.e., 1M.

Assuming wife also has employer group insurance for 4x of her salary.

GAP for wife comes to 1M- 400k i.e., 600k.

DIME calculation is saying the husband need additional insurance for 1.2M and wife need additional life insurance for 600k.

Final thoughts

The DIME analysis doesn't factor in the inflation. But it's still a good and quick method of calculating the insurance need.

Here we assume the family has properly setup will and trust so that if something happens to husband, wife will own all the family assets. Similarly, something happens to wife the husband has access to all the family assets. If both husband and spouse are not there, then, the trustees of the trust or the executor of the will is going to ensure the assets go to the beneficiaries. After forming the trust its good idea to change the beneficiary on the policies to the trust name.

I am 100% sure your DIME numbers will be totally different from the ones discussed in this example. So, have fun crunching your own DIME number.

That's a wrap this week. Happy learning!