How Much Life Insurance do I Need?

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If you have a family, or anyone who would suffer financially if you died, it’s essential to take out life insurance. In a nutshell, life insurance provides your chosen beneficiary with a one-time tax-free payment on your death (as long as you’ve continued to make your payments).

But, although you probably know you need life insurance, you may be struggling to figure out what kind of life insurance to get and how much you need.

How much life insurance do I need?

How much life insurance you need depends on various factors. How much you need will likely differ from others. If you’re trying to figure out an exact number, consider the following:

Start with your net income

Take your annual net income (or after-tax income) and multiply it by the number of years you’d like to be able to replace that income if anything should happen to you. As a rule of thumb, you should probably be able to provide a minimum of five to seven years of annual income to your beneficiaries.

Ask yourself who relies on you?

Ask yourself the following questions: Do you have a partner or spouse? Children? If so, how old are they and how many do you have? What are your dreams for their future? For example, do you want them to have the opportunity to attend university or college? Do you want them to remain in the same home? Is it important to you that your family continues to enjoy life’s little pleasures, such as yearly family vacations? The more people who depend on you, the more coverage you need.

Don’t discount non-monetary contributions

If you are not the main breadwinner in the family, you may believe only your spouse needs to have life insurance. But, consider this: if you are the primary caregiver for your children or other dependents, your labour would have to be replaced if you died. Ask yourself how much it would cost your spouse in childcare, housekeeping services and meal prep if you weren’t around. Then insure accordingly.

Tally your debts

Do you have a hefty mortgage, a lingering student loan, car loans or credit card bills? If so, tally them up. You will want to ensure your spouse or partner can pay off those debts if you die. Having cash to pay off the mortgage could ensure your spouse can keep your children in their home rather than selling it.

Subtract any life insurance you already have

Many people have mortgage life insurance or get some group insurance coverage through work (often worth one to three times their annual salary). If you’re not sure whether or how much life insurance you have through work, talk to your HR department. Then subtract that sum from the total amount of life insurance you need.  

Subtract your savings and investments

If you have sizeable savings and investments, you may need less insurance. For example, let’s say you have $200,000 in a high-interest savings account. Since that amount is liquid, your loved ones will already have funds to draw upon if you were to suddenly pass.

Life insurance example

If you’re still feeling baffled, take the following example as your model and do your own calculation. Let’s say you are a couple aged 35 and 36. You both work, and you have two children. Your four main life insurance goals include the following:

  • Goal #1: You want to have $10,000 set aside for a funeral in the event one partner should die.
  • Goal #2: You want to be able to pay off your $400,000 mortgage.
  • Goal #3:  You want to be able to cover post-secondary education for your two children when the time comes.
  • Goal #4: You want to be able to replace $70,000 in annual after-tax income for seven years.

What assets do you already have? In this case, we will assume that you have:

  • $100,000 in life insurance through your workplace
  • $30,000 in shared RRSP savings

What is the coverage shortfall? Your total life insurance needs would be approximately $973,000. If you subtract the $130,000 in assets you already have, you’re left with a coverage shortfall of about $843,000. At the bare minimum, you’ll want to get coverage for that amount, but some people may want more.

What is life insurance?

Think of life insurance as a way to protect your family’s financial security. You pay a monthly premium, with the guarantee that, if you die, your family will receive a one-time cash payment to help them with the cost of living and raising a family.

When you take out a policy, you and your insurer agree on the amount of the premiums owing (your monthly payments), the time frame of the agreement (how long you will be covered), and the amount of pay-out in the event of your death.

You can get optional riders that adjust coverage to fit your needs. For example, you might choose a rider that lets you defer paying premiums if you become disabled, or that gives you more coverage later in life without a medical exam.

Term life insurance

Term life insurance is the simplest form of life insurance and often the most cost-effective for young families. Basically, you agree to pay premiums for a specific term (usually 10, 15 or 20 years). The insurer agrees to pay out a lump sum if you die before the term is up.

Term life premiums are based on three things: your age, health, and life expectancy. In some cases, you may have to undergo a medical exam. Term policies are usually the cheapest way to get a lot of life insurance coverage, but they tend to go up in cost as you age.

Whole life insurance

Whole life (or universal insurance) combines insurance coverage with a savings vehicle. The monthly premiums are higher, but the policy is meant to be renewed for as long as you live, and it grows in value as time goes on. As a policyholder, you can make withdrawals from the policy for any purpose.

On the plus side, over time, the cash value growth in your policy may be enough to cover your premiums. There are also several tax benefits to whole life policies, such as tax-deferred cash value growth and tax-free access to the cash portion.

On the minus side, whole life carries higher monthly premiums and the growth rate of the policy’s cash value generally doesn’t compare well to investments such as mutual funds and exchange-traded funds (ETFs). Administrative fees can also cut into the rate of return. As a rule of thumb, most advisors suggest buying term insurance and investing the difference.

When should I get life insurance?

There’s no hard and fast rule, but most people begin to think about getting life insurance when their lives change and they realize others are counting on them financially. The most common include:

  • When you’ve just tied the knot – You owe it to your spouse to think about what would happen if one of you should die. If you own nothing and have no children, this is probably less crucial, but if you are the sole breadwinner or have taken on debts and other financial burdens, you need to think about what would happen if you were gone.
  • When you’ve just become a parent – For many people, the helpless heft of a newborn in their arms becomes the impetus for taking out a life insurance policy. Life insurance helps provide for your children in case something happens to you.
  • When you’ve just become a home-owner – For many Canadians, a home is the biggest and most expensive asset they will ever own. Life insurance can help your family pay off the mortgage if you die.
  • You’ve just started a business – If you’ve started a business with one or more partners, life insurance is a must. It can allow the surviving partner to help pay off debt, carry overhead expenses and pay for your replacement. 

How much does life insurance cost?

The short answer: life insurance doesn’t have to cost the earth. The average cost of life insurance per month in Canada ranges from $15 to $100, according to PolicyMe, an online vendor of life insurance. The cost varies according to your age, gender, health and the type of policy you have. Here are a few examples of the cost of term life insurance:

  • For ages 40 and under – The average monthly cost of term life insurance in Canada for those aged 40 and under was $26.55 for $500,000 coverage and a 10-year term.
  • For all ages – The average cost of term life insurance in Canada was around $34 a month or $380 per year in 2023, according to industry-wide data.
  • For smokers – Life insurance for smokers costs more, at $79.91 per month for a male and $57.72 for a female.

The cost of whole life insurance is more expensive. On average, whole life insurance costs $291.05 monthly for males and $337 for females.

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About Camilla Cornell

Camilla Cornell is an award winning writer who has written on personal finance, business and travel for the Financial Post, The Globe and Mail, the Toronto Star and many national magazines

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