Ask three advisors how much life insurance you need and you will hear three different numbers. That is because there are two major frameworks for sizing a life cover — Human Life Value (HLV) and income replacement — and each makes different assumptions about your future, your family, and the way money loses value over time.
This guide breaks down both methods, walks through a worked example for a 35-year-old earning $80,000 with two kids, and shows when to use which approach. By the end you will know how to defend the number you pick & avoid the most common mistakes buyers make.
What Is Human Life Value (HLV)?
Human Life Value is the present value of your future earnings, minus what you would have spent on yourself. The idea, first formalised by economist Dr. Solomon S. Huebner in the 1920s, is that a working person is a financial asset to their family. If that asset disappears, the family loses a future stream of income, and insurance should restore the economic value of that lost stream.
The HLV calculation has four ingredients:
- Current annual income after tax
- Self-consumption — the share of income you spend purely on yourself (often 25–35%)
- Working horizon — the years between today and your planned retirement
- Discount rate — the rate used to convert future dollars into today's dollars, often a risk-free rate net of inflation
The formula in plain English is: take income, subtract self-consumption, project that net contribution forward for each remaining working year (optionally with a salary growth rate), and discount each future year back to today's value. The total is your HLV.
What Is Income Replacement?
Income replacement is a family of simpler methods that try to estimate how much capital your dependants need to maintain their lifestyle. The two most popular versions are the 10x rule and the DIME formula.
The 10x Rule
Multiply your annual gross income by 10. A $50,000 earner needs about $500,000 of cover; an $80,000 earner needs about $800,000. Some advisors recommend 12x or 15x for younger buyers and 5–7x near retirement. The 10x rule is a starting point, not a final answer.
The DIME Formula
DIME is a four-bucket checklist:
- D — Debt: all non-mortgage debt (credit cards, car loans, personal loans)
- I — Income: annual income multiplied by the number of years your family needs support
- M — Mortgage: outstanding home loan balance
- E — Education: projected cost of educating each child through college
Add the four buckets to get a recommended cover. DIME is more personalised than 10x because it acknowledges debts and education goals, but it still ignores inflation, investment returns on the lump sum, and the spouse's earning capacity.
Worked Example: Priya, Age 35, Earns $80,000, Two Kids
Let us run the same family through both methods.
Profile: Priya is 35, plans to retire at 60, earns $80,000 after tax, spends about 30% on herself, has a $180,000 mortgage outstanding, $20,000 in car and credit card debt, and two children aged 5 and 8 who will need roughly $60,000 each for college.
Method 1 — 10x Rule
Cover = $80,000 × 10 = $800,000Simple, but it does not tell us whether $800,000 actually pays off Priya's debts or funds her children's degrees.
Method 2 — DIME
D = $20,000
I = $80,000 × 15 years = $1,200,000
M = $180,000
E = $60,000 × 2 = $120,000
Total = $1,520,000DIME gives a far more concrete picture — the family needs about $1.52 million to clear debts, fund education, and replace 15 years of income.
Method 3 — Human Life Value
Priya keeps 70% of her income for the family (after self-consumption), or $56,000 per year. With 25 working years left, a 5% salary growth assumption, and a 7% discount rate, the present value of that future contribution stream is approximately:
HLV ≈ $56,000 × PV factor (25 yrs, 5% growth, 7% discount)
HLV ≈ $56,000 × 19.3
HLV ≈ $1,080,000HLV lands between the 10x figure and the DIME figure. Most planners would recommend Priya buy roughly $1.5 million of term cover — the higher of HLV and DIME — because term insurance is inexpensive at her age and over-insuring by a small margin is much safer than under-insuring.
Pros and Cons
Human Life Value
Pros: respects salary growth, inflation, and the time value of money; produces a defensible number; scales naturally for high earners with long careers; aligns the cover with your actual economic value.
Cons: sensitive to the discount rate and growth assumptions you pick; harder for buyers to compute by hand; can under-state cover for people with large lump-sum needs (a big mortgage or imminent college bills) because it averages those into a stream.
Income Replacement (10x & DIME)
Pros: fast, transparent, easy to remember; DIME directly addresses real liabilities; great for a five-minute sanity check.
Cons: 10x ignores debts, dependants, and assets entirely; DIME ignores inflation and the return your family will earn on the payout; both struggle with very high earners or very young buyers.
When HLV Makes Sense
- You are a high earner where 10x undershoots your true economic contribution.
- You are young with a 25–40 year working horizon — the compounding effect of salary growth is large.
- Your income is expected to grow substantially (doctors, founders, professionals on a clear career ladder).
- You want a number that an actuary or financial planner would also defend.
When the 10x Rule Is Good Enough
- You need a quick estimate in five minutes.
- You are early in your career with stable income and few dependants.
- You are doing a sanity check on a number an agent gave you.
- You are buying a small top-up term policy on top of existing cover.
Common Mistakes to Avoid
- Ignoring inflation. A $1 million payout invested at 6% in a 4% inflation world loses real purchasing power over a 20-year horizon. Always think in real, not nominal, dollars.
- Double-counting goals. If your retirement plan already funds your spouse's retirement, do not also load 25 years of "spousal income" into the life cover. Pick one bucket.
- Forgetting spouse income. If your partner earns, the family does not need 100% of your income replaced. Net the spousal contribution out before sizing the cover.
- Ignoring existing cover. Group life from your employer, mortgage protection, or accidental death riders already provide some cushion. Subtract them before buying more.
- Using gross instead of net income. Your family loses your take-home, not your gross paycheque. Tax and payroll deductions disappear with the income.
- Buying for life when term is enough. Income replacement is a finite need — it usually ends at retirement. Term plans cost a fraction of permanent policies for the same cover.
- Never recalculating. Marriage, a new baby, a mortgage, or a job change can shift your need by 30–50%. Revisit every 2–3 years.
A Quick Word on Discount Rates
The single biggest lever in any HLV calculation is the discount rate you choose. A lower discount rate (say 4%) values future earnings more highly and produces a larger HLV. A higher discount rate (say 8%) shrinks the present value of distant earnings and produces a smaller HLV. A reasonable middle path is to use the long-term yield on government bonds in your country, less expected inflation — this gives you a "real" discount rate and keeps the HLV number honest. Re-run the calculation with two or three different rates and look at the range, rather than treating any single number as gospel.
Don't Forget Disability and Critical Illness
Life cover only pays out on death. Statistically, a working adult is far more likely to be temporarily or permanently disabled than to die during their working years. A complete protection plan pairs life cover (sized via HLV or DIME) with disability income insurance and, optionally, a critical illness rider. Sizing those is a separate exercise — but the same principle applies: replace the income, fund the goals, and clear the debts.
How to Pick a Final Number
A practical approach used by many planners:
- Run the 10x rule first as a floor.
- Run DIME to confirm specific liabilities and goals are covered.
- Run HLV to capture the time value of your future earnings.
- Take the higher of DIME and HLV, then subtract any existing employer or personal cover.
- Round up to the nearest convenient policy size — the marginal premium for an extra $100,000 of term cover at age 35 is usually trivial.
This guide is educational, not insurance or financial advice. Consult a licensed insurance advisor for your situation.