How much life insurance you need is one of the first questions people ask, and one of the easiest to answer badly. A quick rule of thumb gives a number in seconds. A careful answer takes a little longer, but it is built on your actual debts, your family and the coverage you already have. This guide explains both approaches, works through an example with clearly hypothetical numbers, and covers how the right type of coverage depends on what the money is for.
Life insurance exists to replace money your household would lose, or need to spend, if you died. The Financial Consumer Agency of Canada notes that a death benefit can be used to replace income, pay debts and cover funeral costs. The right amount is the gap between those needs and the resources your family would already have.
The income multiple rule of thumb
The most common shortcut is to buy coverage equal to a multiple of your income, often somewhere between five and fifteen times your salary. It is popular because it is simple, and it is better than having no number at all.
The problem is that it is crude. A salary multiple does not know:
- whether you have a $600,000 mortgage or no mortgage at all
- whether your children are toddlers or already working
- how much you have saved, or how much you owe on credit lines and car loans
- whether your partner earns a similar income, a smaller one or none
- how much coverage you already have through work or an existing policy
Two people earning the same salary can need very different amounts. A single person with no dependants may need little beyond final expenses and debts. A parent with young children and a large mortgage may need well beyond ten times income. Use a multiple only as a quick sense check against a proper calculation.
The needs approach, step by step
The needs approach adds up what your family would need, then subtracts what they would already have. It looks like more work, but each line is something you can estimate.
What your family would need
Debts that would remain. Start with the mortgage balance, then add lines of credit, car loans, student loans and credit cards. Many families want the mortgage paid off in full so the household can stay in the home.
Income replacement. Estimate how much of your after tax income your family would need each year, and for how many years. A common approach is to cover the years until the youngest child is independent, or until your partner reaches retirement. If the mortgage is being paid off separately, leave mortgage payments out of this figure so they are not counted twice.
Childcare. If a surviving parent would need to pay for care they currently provide themselves, include that cost for the years it would apply.
Education. If you plan to help your children with post secondary costs, include a target amount per child, less what is already saved in an RESP.
Final expenses. Funeral costs, legal and estate administration fees, and any tax due on death. Registered accounts, other than a TFSA with a successor holder or beneficiary, and investments with large gains can create a tax bill at death that is worth estimating with your accountant.
An emergency cushion. A few months of expenses to give your family time to adjust without forced decisions.
What your family would already have
Savings and investments that your family could reasonably use, not including money already earmarked elsewhere.
Existing life insurance, including any individual policies and group coverage through work.
Government benefits. The Canada Pension Plan pays a death benefit with a basic amount of $2,500, with a possible top up in some situations, and a survivor's pension may also be available. These amounts help, but they are small next to most families' needs.
Why group coverage may not follow you
Coverage through an employer is valuable, and the FCAC suggests checking what you already have through work before buying more. Two cautions apply. Group coverage is often set at a modest multiple of salary, which may fall short of the needs above. And it generally depends on your job. If you change employers, are laid off or retire, the coverage may end or become expensive to continue, at an age or health stage when a new individual policy could cost more or be harder to obtain. Many people treat group coverage as a helpful extra rather than the foundation.
A worked example
The following is a hypothetical example to show the method. The numbers are invented for illustration and are not a recommendation for anyone.
Sam is 36, earns $85,000 a year, and has a partner who works part time and two children aged 3 and 6. The household has a mortgage and some savings.
| Need | Hypothetical amount |
|---|---|
| Mortgage balance | $450,000 |
| Car loan and line of credit | $15,000 |
| Income replacement: $45,000 a year for 15 years | $675,000 |
| Childcare: $10,000 a year for 5 years | $50,000 |
| Education: $40,000 per child for 2 children | $80,000 |
| Final expenses and estate costs | $20,000 |
| Emergency cushion | $20,000 |
| Total needs | $1,310,000 |
| Resource | Hypothetical amount |
|---|---|
| Savings and investments available | $60,000 |
| Group life insurance at work (2 times salary) | $170,000 |
| CPP death benefit (basic amount) | $2,500 |
| Total resources | $232,500 |
The gap is $1,310,000 minus $232,500, or about $1,077,500. Sam might look at coverage in the range of $1 million to $1.1 million, and consider whether some of it should be independent of the job.
Compare that with the rule of thumb. Ten times income would be $850,000, about $227,500 short of this calculation. For a single person with no mortgage, the same rule would likely overshoot. That is the main weakness of a multiple: it is the same answer for very different lives.
This example is deliberately simple. It does not account for inflation, investment growth on the payout, taxes on a survivor's own income, or a partner's pension and benefits. A licensed advisor would usually refine each of these.
Matching the type of coverage to the need
Once you know roughly how much coverage you need, the next question is what kind. The FCAC describes term insurance as coverage for a set period with no cash value, and permanent insurance as coverage for life that typically builds cash value.
Term life insurance is often a fit for needs that end. A mortgage gets paid down, children grow up and savings build over time. Term premiums are generally lower at the start than permanent coverage, which makes larger amounts more affordable in the years when needs are highest. Coverage ends when the term ends, and renewal premiums can be higher. See our term life page for more.
Whole life insurance is a type of permanent coverage with level premiums and a cash value component. It is more often considered for needs that last a lifetime, such as final expenses, estate costs or leaving a legacy. See our whole life page.
Universal life insurance pairs permanent coverage with an investment account inside the policy, which offers more flexibility but also means values can rise or fall with the investments chosen. See our universal life page.
Many families combine the two: a permanent policy sized to lifetime needs, and term coverage layered on top for the years of peak responsibility.
How your needs change over time
Life insurance needs are not fixed. They typically rise as you take on a mortgage and have children, peak while children are young and debts are large, and then fall as the mortgage is paid down, children become independent and savings grow.
That is one reason a layered approach can make sense, with some coverage ending as specific needs fall away. It is also why coverage is worth reviewing after major life events: marriage or a new partner, a new child, buying a home, a significant change in income, starting a business, or separation.
What affects the cost of coverage
We do not quote premiums in a guide like this, because they depend on the person and the insurer. The main factors are well known, though. The FCAC lists age, sex and medical history among the factors that set premiums, and explains that insurers use underwriting to decide how much coverage to offer, what is excluded and what you will pay.
- Age. Coverage generally costs more the older you are when you apply.
- Health and medical history. Insurers may ask a medical questionnaire or request an exam.
- Tobacco use. Applications commonly ask about it, and it can have a significant effect on price.
- Term length and amount. Longer terms and larger amounts cost more.
- Type of coverage. Permanent coverage generally costs more at the start than term coverage for the same amount.
One more point matters a great deal. The FCAC advises that you answer every application question completely and honestly, because an incomplete or inaccurate application can lead an insurer to cancel the policy or refuse a claim.
Putting it together
A good answer to how much life insurance you need starts with your own numbers: what your family would owe, what they would need to live on and for how long, and what they would already have. A salary multiple can tell you whether you are in the right range, but it should not be the final word.
If you would like help with the calculation, a licensed advisor can work through it with you, compare term and permanent options from more than one insurer, and set a review schedule as your life changes. Start with our life insurance overview for more on how the options compare.