How Much Life Insurance Do I Need? 5 Simple Ways to Calculate Your Coverage

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How much life insurance you need largely depends on your income since you want a life insurance payout that's large enough to replace your earnings, with a little extra besides to guard against inflation.

That said, a solid financial safety net looks different for everyone, nor do you want to be either underinsured or overinsured.

We'll walk you through five popular methods so you can calculate how much life insurance you actually need in Canada, without the headache.

How to calculate how much life insurance coverage you need in Canada

Let's take a look at six different methodologies for calculating the amount of life insurance coverage you need to protect your family.

1. PolicyMe's online term life insurance calculator

PolicyMe's term life insurance calculator takes the guess work out of the equation.

And no, you don't need to buy from us to use it. You can use the calculator’s recommendations for any term life insurance product.

We're pretty proud of this calculator because it takes inflation into account. It also asks for your partner's income and any existing savings, so we don't calculate more life insurance than you need.

Here's how it works:

  • You input a few details around your income, your family makeup, your housing costs, your savings, any existing life insurance coverage and monthly expenses.
  • The calculator adds up all the money that your family spends.
  • The calculator subtracts out all the money your family will have in the future.
  • The difference between these two amounts is the amount of life insurance you need.
  • We'll give you three options: budget-friendly, standard and high coverage.
  • We'll recommend how much you should be covered for, for how long and how much it'll cost you in monthly premiums with PolicyMe.

There's no obligation around the recommendation. You can then further customize your recommendation if you want more or less coverage based on price or other considerations. Your final price is determined after you apply but even then, there's no obligation until you formally e-sign your policy.

2. Add up your financial obligations and assets

Take a close look at your family's finances if you want to start calculating how much life insurance coverage you need.

Adding up your current obligations and assets can give you a more detailed picture of how much your family would need if you or your partner weren't there to financially support them.

When you're adding up your financial obligations list, make sure to consider the following:

  • Income replacement: Take your 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 allow your family to 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. 

For your liquid asset list, include:

  • Any savings or investment accounts you hold
  • Your spouse's income
  • The value of other insurance plans you might hold (i.e. a group life insurance policy from work)

Calculate these and subtract the total from your current (and future!) financial obligations. Everyone will choose to prioritize different things, so feel free to take or leave some of the suggestions above. 

The remaining number will tell you how much life insurance coverage you need.

Want to skip the math? Use our life insurance calculator to input your details and get a customized recommendation online in seconds. We'll give you three options: budget-friendly, average and full coverage prices.

3. Multiply your income by 10

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

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

This calculation method is popular for its simplicity. And it’s better to use a quick calculation than none at all when estimating how much life insurance you should have. 

But it ignores the nuances of your family’s unique situation. 

Like the number of children you have, the value of the assets you own, and the debts you have are all factors that should be considered when calculating the life insurance you need. 

Unfortunately, none of these factors are considered when simply multiplying your yearly salary by an arbitrary factor.

4. 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:

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

The catchy acronym makes it easy to remember. However, it leaves out majorly important variables. 

Like your spouse’s income, shared assets, and any existing life insurance coverage are not accounted for at all in this calculation. 

This means the DIME method will likely overestimate the amount of life insurance coverage you need, costing you more than you need to pay for your premiums. 

5. Reddit’s r/PersonalFinanceCanada’s advice on how much life insurance you need

Many of us hop online when looking up a topic we’re not sure about – it’s probably why you’re here, right? Reddit is a great place to get some crowdsourced wisdom on just about any topic, even life insurance. And how much coverage you really need. 

On the r/PersonalFinanceCanada subreddit, commenters generally agree term life insurance is ideal for alleviating the financial impact your passing might have on your family. 

How Much Life Insurance Do I Need: Image of reddit forum header "r/PersonalFinanceCanada"

Commenters mention taking into account your income, your children’s ages, and whether you want to help pay for their education, existing debts, and assets, which is similar and consistent with the calculation methods suggested above. 

They also stress that there’s no one-size-fits-all coverage. You will need to take a close look at your finances to determine the optimal amount. 

While light on the specifics, the advice on this forum points you in the right direction. We’d suggest following through by conducting an in-depth calculation comparing your assets, debts and obligations; present and future. 

6. Dave Ramsey’s advice on how much life insurance you need

Dave Ramsey, well-known personal finance guru, also has a thing or two to say about life insurance

How Much Life Insurance Do I Need: Image of Dave Ramsey

He recommends taking out an affordable term life insurance policy for 10 to 12 times your annual income, before taxes, similar to the Government of Canada’s recommendation. 

Ramsey’s rationale? If you pass away, your beneficiaries can invest the payout. Assuming the investment yields returns of about 10%, your loved ones can withdraw an amount equal to your yearly salary without running out of money.

While this is solid advice for some scenarios, it assumes your beneficiaries are savvy investors able to achieve these types of gains. It also ignores any assets you have, making it a possibility that you’re purchasing more coverage than you need. 

Deciding factors for calculating how much life insurance you need

The right life insurance policy depends on your family’s specific needs and goals. When choosing a coverage amount, you want to consider your family’s current and future expenses alongside your income and assets. 

Here are a 4 items to keep in mind:

1. The size of your family. Whether you’re single, partnered up or married, have children or not, the number of people in your household affects the amount of coverage you’ll need. Generally speaking, larger families require more coverage.

2. Your current and future dependents. While this includes your children, will your elderly parents need financial support in the future? Do you have other family members that will depend on you for assistance?

3. The value of a stay-at-home parent. It can be easy to overlook the financial impact of a non-working parent - after all, they’re not bringing home a regular salary. But their efforts contribute to the bottom line: without them, you’d have to pay extra in childcare costs and more if you choose to outsource other tasks such as cooking, cleaning, and household management.

4. Your health and age. As a very general rule of thumb, you’ll need less life insurance as you get older. Usually (fingers crossed!), you’ve paid off more of your financial obligations such as a mortgage or debts, and you’ll have fewer dependents as your children age into adults. But life insurance also costs more when you’re older due to the likelihood of increased health issues. No medical life insurance, which is designed for those with pre-existing conditions, is also more expensive.

Recommended reading: How Does Life Insurance Work in Canada?

If affordability is a concern, term life insurance is the cheapest option and well-suited to a young family. To break down some of the cost differences between term versus permanent 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

Figuring out how much life insurance you need doesn’t have to be complicated and you might be surprised at how affordable it truly is. We’ve done the legwork for you with our life insurance calculator. 

We’ll prompt you with the numbers you need and provide helpful tips along the way. Once you get your life insurance quote, you can apply right away with just a couple clicks.

How much life insurance do you really need for your situation?

Everyone’s circumstances are different, so you might be wondering how much life insurance you really need if you have to take into account your spouse, children, or age. 

Read on to find the scenario(s) that fit best with your situation so you can find out how much life insurance coverage you really need so you don't end up with too little coverage or too much.. 

How much life insurance do I need for my spouse?

Joint life insurance might make the most sense for many married or common-law couples. If you share your finances, assets and obligations, there’s no need to make the calculation twice. 

Choose the life insurance calculation that makes the most sense to you (we prefer comparing the total values between your assets and obligations) and get a joint policy that will cover you both.

But there's also another option for life insurance for couples, instead of a joint life insurance policy, many life insurance providers offer a discount for couples applications.

For example, PolicyMe offers a 10% discount for the first year of premiums for both applicants.

Applying for life insurance shouldn’t be hard. So we’ve made it simple, with an application process that takes minutes, not weeks. 

How much life insurance do I need for my child?

It may not be immediately apparent why you need life insurance for your child.

After all, they’re likely to be very young, healthy, and without financial obligations. But keep in mind that life insurance is designed for those left behind. 

In the unfortunate case of a child’s untimely passing, grieving parents may face unexpected funeral expenses. They may also need to take an extended leave from work to support their spouse, remaining children, and take care of their own mental health.

Having a life insurance policy on your child can help ease the financial burden during a challenging time. 

Providing protection for our customers and their loved ones is why we started PolicyMe. Families shape everything we say, do and build. 

One way that we put families first is through free coverage for kids at no extra cost. This means that if you purchase a life insurance policy from PolicyMe, your kids are automatically covered, up to $10,0000 per child. 

How much life insurance do I need in retirement?

It depends. If you no longer have individuals who are financially dependent on you or significant debts in retirement, you might not need substantial life insurance coverage. 

You may need more coverage if you:

  • financially support your spouse, children, or other family members
  • have debts or obligations you continue to pay
  • have limited assets

Compare the values of your assets to those of your debts as a starting point to consider the amount of life insurance you need. Remember that purchasing life insurance at retirement age will likely cost much more than in your 30s to 40s. 

If you’re concerned about having life insurance in retirement, it’s worth purchasing a policy now with a term that will extend into your older years. 

How much life insurance do you need: term versus whole life insurance

How much term life insurance do I need?

Term life insurance involves coverage that lasts for a set number of years: 20, 25, or 30, for example. For many families, this type of life insurance is an affordable option to protect their loved ones for a specific period – when they’re likely to have the most financial obligations and while their children are still young. 

To figure out the amount of term life insurance you need, we suggest adding your assets and comparing them against your total debts and obligations. The difference between the two numbers is a reasonable estimate of how much coverage you should buy. 

Get your term quote in seconds below. You can apply online in minutes and do it all on your terms without pressure, upselling, or obligations.

How much whole life insurance do I need?

The main difference between term and whole life insurance? Whole life insurance covers – you guessed it – your entire life. Because of the extended duration of coverage, whole life insurance is more costly, but it may make sense for some individuals. 

Premiums can be anywhere from 5 to 15 times more than a similar term life policy. 

But you won’t outlive your coverage, which means your beneficiaries will receive a death benefit upon your passing, whenever it is, as long as you’ve continued to make the necessary payments. 

The amount of whole life insurance you should purchase depends on how much you want to leave to your beneficiaries after you’re gone.

But given the cost of whole life insurance policies, it may be a simpler and more flexible option to purchase term life insurance, and invest the difference. You can access your invested funds whenever you wish, and designate beneficiaries in your will to receive this money after you pass. 

With term, you won’t be obligated to pay the large premiums required to keep your whole life insurance policy active for decades to come. 

If you anticipate your dependents becoming financially independent in the future, and have enough assets to cover your end of life expenses, the average Canadian doesn’t really need whole life insurance. 

Real-life example: Brandon in Windsor, ON

Let’s take a look at one family’s scenario and how they decide how much life insurance they need. 

Brandon is a 35-year-old Manufacturing Engineer living in Windsor, Ontario. He's married with two kids aged five and three and wants to make sure that his family has enough financial protection if he's no longer there to help.

How Much Life Insurance Do I Need: Image of father holding child in sunlight outside

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 $65,000 a year and thinks his family will rely on that income until his kids are 18 years old (16 more years). $65,000 x 15 = $975,00
  • Mortgage balance: He bought his house for $200,000 10 years ago, 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 (number based on Knowledge First). They’ve saved about $10,000, so they need $110,000.
**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 vital in ensuring your family has the right amount to fall back on if the unlikely were to happen.

In summary: You need the life insurance coverage that you can afford

How much life insurance coverage do you need? Since life insurance protects the people who depend on you, you have consider their needs if you pass away and create a financial plan around that.

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

If you're wondering if life insurance is worth it, remember, it’s always better to buy a smaller policy than to have no policy in place. Any life insurance coverage will help ease your family’s financial burden if you’re gone.

Protecting your family 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 should I have in Canada?

How much life insurance should I buy at age 55?

Regardless of your age, determining the gap between your assets and your obligations is a good place to start when calculating the amount of life insurance coverage you’ll need. 

At 55, you may be in a period of transition, between work and retirement, with children in post-secondary school or living on their own. All these factors play into how much life insurance you may need. 

How much life insurance should I buy at age 60?

At 60, your debts and obligations may be much smaller than they were earlier on in your life. Your mortgage might be paid off, your kids grown, and you may be nearing retirement (or already retired)! 

You may consider life insurance to help your loved ones cover any remaining debts in the event of your passing. You can calculate the amount of coverage you’ll need by looking at the difference between the assets you hold and your existing debts.

Laura McKay

COO & Co-Founder

About the Author

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