Life insurance is a good way to protect your family, and the DIME method is a good way to calculate your life insurance needs.

Purchasing a life insurance policy to protect your family if anything happens to you is a good financial decision and an easy one to make. The hard part is figuring out how much life insurance you need. The DIME method (debt, income, mortality, education) can help you tackle the calculations.

Add Up Your Expenses

The main reason for purchasing life insurance is to be sure there is enough money to cover your expenses and debts when you die. Use the DIME method to help estimate the amount of money your survivors would need if you should die unexpectedly.

Debt: Use your current financial picture to make a list of the outstanding balances of everything you owe. Think of your monthly installment loans like your mortgage, car payment, and student loans. Be sure to include your home equity loan and any personal loans. Add to the list your current credit card balances and any other debts you have.

Income: If you die, your family would no longer have the benefit of your income to cover routine expenses. You will want the amount of your life insurance policy to include the income your family would be missing so they could continue living a similar lifestyle. Your income includes your salary and any other income, like a disability benefit or investment income, which would end when you die.

It is common to plan for a life insurance benefit to provide for your family for 10 to 15 years. Think about how many years it might take your family’s overall financial picture to change after your death, and multiple your annual income by that number.

Mortality: Dying can be expensive. Depending on the circumstances, your death could be directly preceded by expensive medical care. The cost of end-of-life medical care varies greatly by state. In some states it can start at $10,000 while in others it begins around $30,000 and goes up from there.

If you should die suddenly, there are still expenses to consider. A burial or a cremation will cost your loved ones several thousand dollars. According to the National Funeral Directors Association, the average cost of a cremation is slightly less than a burial, and funeral costs in some states are almost twice as high as other states. If you live in a state where the cost of living is high, you might need to plan for more than $10,000 in funeral expenses.

Education: One more large financial obligation you want your life insurance to cover could be the cost of your children’s education. Add up the costs of childcare, private school, college tuition and other related expenses you intend to pay. Include your spouse’s education expenses if they plan to go back to school. Consider that your spouse may need additional education to re-enter the workforce or to get a higher-paying job after you die.

Subtract Your Savings

The sum of all the expenses you would want a life insurance policy to cover in the event of your death is probably quite high. These expenses might be offset by your savings and other benefits. For example, if you have already established a 529 education savings account, you can subtract the balance of that account from your total expenses.

After your death, your survivors might be entitled to Social Security benefits. The number of Social Security credits you earn before your death will determine the amount of your survivor benefits. Your surviving spouse may need to wait until age 60 to begin collecting your Social Security, but your minor children should be eligible at the time of your death. You’ll need to do some research to determine an approximate amount for your potential survivor benefits, but then you can subtract that amount from the total you need a life insurance policy to cover.

You can also subtract any existing life insurance policies. You may have a small policy through your employer that you forgot about. Check with the human resources department to determine the value of that policy and subtract that amount as well as funds from your retirement plan.

Special Considerations

Subtracting will lower the amount of life insurance you need, but you might have some special considerations that increase the amount a bit. For example, if you have a child with special needs, their financial dependence will continue after you die. The best long-term financial planning for a child with special needs includes saving instruments designed specifically for parents in your position. The balance of those accounts may offset some of the expenses you need to cover with life insurance. If you die before those investments are mature, you may need a portion of your life insurance to continue funding those accounts.

Another special consideration to your life insurance planning would be providing for an aging or chronically ill loved one. If you are supporting a parent or grandparent, for example, you will want to make financial arrangements to continue that support if you predecease them. Calculate the annual expenses related to your loved one’s care, multiple it by the number of years they might live and add it to your total expenses.

When you complete this DIME exercise, you will have a pretty big number in front of you. Rather than letting that discourage you from buying life insurance, let it motivate you to investigate the options. The total amount you calculate may seem high, but before you panic, check out your options, starting with term life insurance. Always get quotes from multiple carriers to maximize your options. It is a good idea to consult a financial expert before locking into any long-term financial plan such as life insurance.