You love your family and want to protect them in case the unlikely happens. You’ve started your research, but there are so many options in Canada for term length and dollar amount.

Do you get $100,000 in coverage or $1 million? It’s hard to decide what your family needs without being over or under-insured.

In this post, we’ll tell you what to think about in terms of your family’s current and future financial needs. Plus, we’ll give you three different methods to calculate how much life insurance you actually need.

Who needs life insurance?

To understand how much life insurance you need, first let’s talk about what life insurance does and who should buy it.

Life insurance protects the people who depend on you financially, like your partner or spouse, young kids or ageing parents.

In short, you need life insurance if you have people who depend on you financially, or if you have large loans, such as a mortgage.

If you pass away and your income disappears, having life insurance means your loved ones can continue to cover their expenses and maintain their standard of living through that tough time.

Examples of why you might need life insurance

Life insurance can be used by your beneficiaries to meet a variety of financial needs in the event of your (very unlikely) passing, including:

  • Paying for the funeral and other costs associated with settling your estate, such as lawyer’s fees.
  • Paying off your outstanding debts, such as car payments, mortgage, loans, or credit cards.
  • Covering ongoing living expenses such as utilities, food, transportation and child care.
  • Paying for your children’s education.

 Read more about who needs life insurance.

Who doesn't need life insurance?

You probably don’t need life insurance if you’re single and don’t have any kids. After all, no one depends on your income, so you don’t have anyone who needs to be protected with life insurance.

You also probably don’t need life insurance if you’re no longer earning an income or if you have enough savings to pay for the expenses that insurance would cover.

What if I’m planning to have a family?

What if you’re planning to get married or have kids one day in the future? What if you develop an illness before then that makes it harder or more expensive to get coverage? Should you buy a policy now just in case?

We would say “no.” If you don’t need coverage today, why pad your insurer’s pockets with insurance premiums that aren’t protecting anyone (yet)? You’d be better off putting your money toward an emergency fund or retirement savings.

Do I need term or permanent life insurance?

Term and whole life insurance differ in four key areas: 

  1. Cost
  2. Policy length
  3. Cash value
  4. Payout

Whole life insurance policies cost more, but will cover you for your entire life and can accumulate cash value through investments. 

Term life insurance policies are more affordable and cover you for a period of time, usually between 10 to 30 years, and have no investment component. 

Whole life insurance pays out upon death, whenever that may be, while term life insurance pays out within your coverage period. 

Learn more about term vs whole life insurance.

At PolicyMe, we've cut unnecessary steps and expenses to offer you term life insurance that’s 10-20% cheaper than the competition in Canada, with coverage from $100,000 to $5 million. We’ll even tell you if you don’t need life insurance at all.

Get a personalized recommendation in minutes, with policy based on your family’s unique situation:

What to consider before calculating how much life insurance you need

The right amount of coverage for you depends on your family’s needs. For example, how many children do you have, or plan to have? Do you have elderly parents to support? Do you have major debts like a mortgage or car loan?

When choosing a coverage amount, you want to think of your family’s current and future expenses alongside your income and assets.

Image of family serving lunch at the dinner table for article about How Much Life Insurance Do I Need?

Be sure to factor in expenses that might not seem like expenses on the surface. For example, if your spouse is a stay-at-home parent, include the expenses you’d have if that parent died and your family had to pay someone to do what they did for free (all that childcare and cleaning). If nothing else, it’ll help you appreciate everything your spouse currently does for your family without pay!

1. Health and age

It’s important to think of personal factors too, such as health and age. For example, if you buy coverage in your late 40s, you’ll probably need less of it than if you had bought coverage in your early 30s. Why? Because, fingers crossed, you’ll likely have less debt and fewer dependents.

Of course, this doesn’t mean that you should put off buying coverage until you’re older. If you need to buy coverage at a younger age, which most people do, you’ll need more of it. But remember that if you’re younger when you apply for a policy, you’ll also get a lower rate for it.

2. Affordability

You’ll pay more for life insurance if you want a larger coverage amount or longer policy length. But you’ll need to make sure that you can afford the monthly premiums for the amount of coverage you want.

Because if you don’t pay your premiums, your policy will lapse. And then it won’t be of any use to your family.

If you can’t afford the amount of coverage you need right now, it’s always better to buy a smaller policy than to put off buying life insurance altogether. After all, giving your family a smaller financial safety net is a whole lot better than leaving them with no safety net at all. 

If affordability is a concern, term life insurance is the cheaper option and is well-suited to a family with young kids, which is something to keep in mind when deciding which type of life insurance to choose.

To break down some of the cost differences between term versus whole life insurance, we’ve put together this handy chart for your reference:

$250,000 20-year term life insurance $250,000 whole life insurance
Male, aged 30 $18/month $135/month
Female, aged 30 $15/month $121/month
Male, aged 40 $28/month $204/month
Female, aged 40 $22/month $178/month
Male, aged 50 $72/month $327/month
Female, aged 50 $51/month $279/month

3 methods to calculate how much life insurance you need

1. Multiply your income by 10

One common way to calculate the amount of life insurance you’ll need is to take your annual salary and multiply it by 10. 

For example, if you make $80,000 per year, your life insurance policy should be $800,000 ($80,000 x 10 = $800,000).

The Government of Canada recommends purchasing life insurance coverage that is 7 to 10 times your annual salary. 

If you want a more accurate estimate, either take our simple online life insurance quiz or chat with one of our non-commissioned advisors via chat, email or phone.

2. DIME method

The DIME formula is a good starting point for your life insurance calculation. DIME estimates how much life insurance you’ll need by considering these four factors:

  1. Debt: How much debt are you leaving behind for your family to deal with?
  2. Income: How much of your personal income does your insurance policy need to cover?
  3. Mortgage: How much money is left on your mortgage?
  4. Education: How much money will be required to cover your children’s education?

3. Add up your financial obligations and assets

Adding up your current financial obligations and assets can give you a more detailed picture of how much life insurance coverage you’ll need. 

When you’re adding up your list, make sure to consider the following:

  • Income replacement: Take your current salary and multiply it by the number of years you think your dependents will need it.
  • Balance on your mortgage: Taking this into account will let your family stay in their home worry-free.
  • Large debts: Include any outstanding debts that might add financial stress onto your loved ones.
  • Children’s education: Make sure your kids are covered for future schooling costs, including tuition, board, and study materials.

Finally, consider any existing liquid assets, such as savings or your spouse’s income. Calculate these and subtract the total from your current financial obligations. The remaining number will tell you how much life insurance you need.

Real-life example: Brandon in Windsor, ON

Brandon is a 37-year-old Manufacturing Engineer living in Windsor, Ontario. He’s married with two kids aged five and two and wants to make sure that his family has enough financial protection if he’s no longer there to help.

Image of father holding daughter, both smiling in a field for article about How Much Life Insurance Do I Need?

Brandon and his spouse have a mortgage to pay and childcare costs to consider. They put a little bit away each month for their kids’ future college funds. 

Here’s how he calculates how much life insurance he needs:

  • Income replacement: He earns $75,000 a year and thinks his family will rely on that income until his kids are 18 years old (16 more years). $75,000 x 16 = $1.2 M
  • Balance on his mortgage: He bought his house for $200,000 10 years ago (real estate in Windsor is cheap!) and he has an outstanding balance of $100,000.**
  • Large debts: Brandon and his wife paid off a line of credit to help renovate their basement family room last year (good job!). So, $0.
  • Children’s education: He and his wife estimate a four-year university program will cost about $60,000 per child by the time they graduate high school. They’ve saved about $10,000, so they need $110,000.

The verdict? Brandon needs $1.4M in coverage. He could buy a 15 year term with PolicyMe at $81.79 per month.

**Based on a 20% down payment and a 20 year amortization period, calculated using the CMHC Mortgage Calculator.

If something were to happen to Brandon, his family wouldn’t only have to worry about covering their day-to-day expenses, but their debts and their future expenses as well. 

Including these factors when calculating how much life insurance you’ll need is important in making sure your family has the right amount to fall back on if the unlikely were to happen.

How much is life insurance going to cost me?

If you buy a term life insurance policy, you can choose a coverage amount that’s anywhere between $20,000 and $10 million. 

Most people in their 30s and 40s buy policies in the $250,000 to $1 million range.

Wondering how much life insurance will cost you per month? Here are some example term life insurance quotes for people with different needs:

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In summary: It’s better to buy a smaller policy than no policy at all

Since life insurance protects the people who depend on you financially, it’s important to consider what their needs will be if you pass away. 

Think about your family’s current and future expenses alongside your income and assets. 

And remember, it’s always better to buy a smaller policy than have no policy in place at all. 

Protecting your family financially means making sure they have a financial safety net, and a small net is better than no net at all.

FAQ: How much life insurance do I need?

What happens if I’m denied life insurance?

If you get denied life insurance, you still have options. You could try a different insurer who might be willing to give you a break, or you can apply for no medical life insurance, which lets you get coverage without completing a detailed medical review.

If you’ve exhausted all other options, you could get coverage through a group plan with your employer. Although the life insurance you get through work typically isn’t enough to fully protect your family, a partial financial safety net is better than nothing.

Do life insurance companies contact beneficiaries?

Not typically. It’s up to the beneficiary to file a claim with the insurance company to receive their life insurance payout.

The life insurance company may reach out if the beneficiary has been named on a policy that has gone unclaimed for a period of time.

Do life insurance companies check medical records?

Depending on how you answer the questions on your insurance application, an insurance company might request more information about your medical history, and you may be required to participate in a health exam.

If you would prefer to skip the medical exam, no medical life insurance might be the right fit for you. 

What is the average life insurance payout?

Life insurance payouts can range greatly depending on the policy. At PolicyMe, for example, the payout can range from $100,000 to $5,000,000.

Want more guidance on where to start?

Take PolicyMe’s online life insurance checkup. In just five minutes, it’ll help you identify the coverage amount and policy length you need to protect your family.

Laura McKay

COO & Co-Founder

Laura brings 7 years of experience working in insurance & strategic operations as a management consultant at Oliver Wyman, after experiences at Manulife and Munich Re. In 2017, she launched a successful initiative for the World Economic Forum focused on innovation in insurance, working closely with insurers, tech pioneers, and policy-makers.

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