How Much Life Insurance Do I Need in Canada?
How much life insurance do I need?
At the risk of sounding obvious, life insurance is a product whose benefits you will never see. To calculate how much life insurance you need, we need to get at the heart of what you want to happen when you’re no longer around.
The ideal life insurance policy provides enough coverage to achieve your post-life goals, lasts as long as your financial obligations, and carries an affordable price tag.
Let’s tackle each of these goals one by one. By the end of this section, you should have a clear idea of how much coverage you want, how long you want your policy to last, and the premiums you can afford.
How much life insurance coverage do I need?
The amount of life insurance coverage you choose determines how large of a death benefit your beneficiaries receive. A death benefit is a one-time, lump-sum, tax-free payment that can be used for pretty much anything:
* Figures reflect average pricing of a PSW or RN in Ontario in 2019. ** Bereavement periods and pay vary by workplace, province, and employment status. *** For more accuracy, see the Government of Canada’s guide to retirement planning.
Once you’ve added up the cost of meeting your goals, subtract the value of your existing savings, investments, and other assets, such as coverage provided by your workplace. The result is your desired life insurance coverage. We suggest grabbing a pen and paper to do the math, or skipping to the next section for an easy online calculator and other hacks.
To calculate how much life insurance coverage you need, add up the costs of your current and future financial obligations, and consider the needs of your beneficiaries and dependents.
How long do I need life insurance for?
Like life, most financial obligations don’t last forever. Eventually, your mortgage will be paid off, your children will graduate from school, and you’ll pay your neighbour back for denting his car.
The exceptions are perpetual trust funds or lifelong dependents, such as a child with special needs. In other words, the length of time you need life insurance for depends on how long your financial obligations last.
You have two options: term or permanent life insurance.
Term life insurance pays out if you pass away during a fixed period of time (usually 10 – 30 years) after which it expires. It’s affordable and best for applicants between the ages of 20-60 who need to address specific debts, such as a 20-year mortgage or the years preceding a spouse’s retirement at age 65.
Permanent life insurance (including whole life, universal, and term 100 life insurance) is designed to last your whole life—as long as you pay your premiums, you won’t outlive your coverage. It can be more expensive because it includes a savings or investment component, but these products typically underperform when compared to stocks and RRSPs.
In our experience, term life insurance offers the most value. You don’t overpay for high coverage your entire life, you’re protected against unforeseen accidents during your term, and you have more money to invest and save in high-yield products.
Plus, if you change your mind, most life insurance companies allow policyholders to convert term life insurance to permanent life insurance.
To choose a life insurance product, consider how long your financial obligations are likely to last. Term life insurance is a highly-affordable way to protect against specific financial concerns lasting 10-30 years. Permanent life insurance guarantees coverage for the rest of your life, but it can be more expensive.
How much should I pay for life insurance?
If you can’t pay your premiums, your policy will lapse, so it’s crucial to find affordable life insurance. According to the Government of Canada’s Budget Planner, the average Canadian spends 3% or less of their total income on insurance.
Start by multiplying your monthly or yearly total income by 0.03 and adjust it to suit your financial circumstances and preparedness. If your dependents are very young or very old; if your spouse cannot work; or if you don’t have many assets, you may want to budget more for higher coverage.
Next, find the best deal by comparing life insurance quotes. Reading reviews for the best life insurance companies in Canada can also help you find a provider whose application process, claims process, and customer service standards meet your needs.
If you’re having trouble finding results, revising your desired policy details can help lower your life insurance costs.
To find life insurance you can afford, budget at least 3% of your total monthly or annual income and compare life insurance quotes from multiple providers.
3 Hacks for calculating your life insurance needs
It wouldn’t be a guide without a hack for figuring out your life insurance needs, and we’ve got 3:
- Calculator Method: Use PolicyMe’s online calculator
- DIME Method: Add up your debt, income, mortgage, and education requirements
- Income Multiplication Method: Multiply your income by 7-12
Using these shortcuts, you can shorten the work of estimating your coverage needs, and move onto considering what type of life insurance you want and how much you can afford to pay.
1. Calculator method
PolicyMe's term life insurance calculator walks you through the most important questions regarding coverage, including your spouse’s income, your children, your savings, and any existing coverage provided by your workplace.
Once you’ve answered every question, the tool delivers a recommended term and 3 coverage options with an estimated monthly price: “Budget-Friendly,” “Just Right,” and “More Protection.” It even accounts for inflation, so your death benefit will keep pace with rising costs.
Below the tool, you can see a breakdown of how your coverage was calculated. There are no signup requirements and no obligation to buy, and if you have any more questions, you can get help from one of our licensed insurance experts.
2. DIME method
The DIME method estimates how much life insurance coverage you need by looking at 4 major factors:
- Debt: Add up the total amount of debt to be repaid after your passing.
- Income: Add a percentage (or the entire amount) of your annual income to be replaced, multiplied by the number of years you’d like to provide it for.
- Mortgage: Add the amount remaining on your mortgage, plus the cost of early repayment fees.
- Education: Add the money required to send a child to school for 4 years, multiplied by the number of children you have.
DIME covers the basics, but it doesn’t account for your spouse’s income and the value of your existing assets, so you might end up overpaying for coverage.
3. Income multiplication method
The last and simplest method for estimating how much life insurance coverage you need is to multiply your annual income (before tax) by 7-12.
Why 7-12? Well, the Government of Canada recommends 7-10 and financial guru Dave Ramsey recommends 10-12 (so your beneficiaries can invest the payout).
If you make $80,000 per year, your recommended life insurance coverage would range from $560,000-$960,000 (that’s $80K x 7 = $560K, and $80K x 12 = $960K)
FAQ: How much life insurance do I need in Canada?
