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Methodology · Life Insurance

Life insurance methodology

Reviewed by · Last reviewed .

How we compute life-insurance coverage need on the Term Life Insurance Coverage Need Calculator: the three industry methods (DIME, income multiplier, Human Life Value) side-by-side, the assumptions baked into each, and the primary sources we cite.

DIME framework

DIME stands for Debt + Income (replacement years × annual income) + Mortgage + Education. It is the most common "professional" rule of thumb used in financial planning. The implementation here:

  • Debt — non-mortgage debt the household carries
  • Income — annual income × user-selected replacement years (default 10)
  • Mortgage — outstanding mortgage principal
  • Education — per-child education funding goal × number of dependent children

DIME does not discount future income, does not net out existing assets, and does not adjust for the surviving spouse's earnings capacity. Treat it as a floor, not a target.

Income-multiplier method

The 10×–12× income rule appears in LIMRA industry literature and most general-public financial-education content. The math is deliberately simple: 10 years of annual income, undiscounted, with no adjustments. Strengths: instant sanity check, transparent. Weaknesses: ignores debt structure, ignores existing wealth, undersizes for high-debt households, oversizes for households with significant existing assets.

Source: LIMRA limra.com industry research; ACLI Life Insurers Fact Book.

Human Life Value (HLV)

Human Life Value, formalized by Solomon S. Huebner in The Economics of Life Insurance(1927), computes coverage need as the present value of the deceased's expected future earnings net of self-consumption. The implementation:

HLV = Σ (annual_income × (1 - self_consumption_rate)) / (1 + r)^t

For t = 1 to remaining_working_years
Where r = real (inflation-adjusted) discount rate

The discount rate matters enormously — small changes (4% → 5%) can move the answer by 15–20%. We default to a 4% real discount rate (10-year TIPS yield + small spread), surface a sensitivity panel, and cite the rate source in the explainer block.

Tax treatment of death benefits

Per IRC §101(a)(1), life insurance death benefits paid by reason of death of the insured are excluded from the beneficiary's gross income for federal income tax purposes. Exceptions:

  • Transfer-for-value (§101(a)(2)) — proceeds become taxable if the policy was sold to a third party for valuable consideration, with statutory exceptions for transfers to the insured, partners, partnerships, or corporations in which the insured is shareholder/officer.
  • Employer-owned life insurance (§101(j)) — additional notice and consent requirements apply.
  • Estate tax inclusion(§2042) — death benefits are included in the decedent's gross estate if the decedent held any incidents of ownership at death. Irrevocable Life Insurance Trust (ILIT) ownership is the standard structuring response for estate-tax-exposed households.

Term length sizing

We size term length to the longest single financial obligation the policy is intended to cover — typically the youngest child reaching financial independence (age 22 or 25 depending on assumptions) or mortgage maturity, whichever is later. The marginal annual cost of extending term by 5 years is usually small relative to the catastrophic gap of being uninsured for the last 5 years of an obligation; the tool surfaces both the recommended term and the marginal cost of the next 5-year increment.

Sources

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