How Much Life Insurance Do I Need? 6 Ways to Calculate

What does life insurance cover?

Life insurance policies pay out a tax-free lump sum to the named beneficiaries when the policyholder passes away. 

Depending on the family’s financial situation and the obligations that are left to them when the policyholder passes away, this money can be used to cover:

If the policy was either term or whole life, there are virtually no limits to what the death benefit can be used for. It’s a significant safety net for families—especially those who’ve lost the primary income earner. 

How much life insurance coverage do you need in Canada? 6 methods

There are a few ways to determine how much life insurance coverage you need in Canada. Typically, the right coverage takes into account: 

• Your existing and future financial obligations 
• How long your dependents will rely on you financially
• How much you can afford in premium payments. 

Here are six different methods you can use to calculate your life insurance needs.

1. Multiply your income by 10

The Government of Canada recommends buying life insurance coverage that's 7-10 times your annual income.

For example

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

This method of calculation is popular for its simplicity. It’s better to use a quick calculation than none at all to estimate how much life insurance you need.

But this technique isn’t perfect! It ignores the nuances of your family’s unique situation like:

• The number of children you have
• The value of the assets you own
• The debts you have 

Unfortunately none of these factors are considered when simply multiplying your yearly salary by an “arbitrary” number. But it can be a good starting point to give you a ballpark number.

2. PolicyMe's online term life insurance calculator

PolicyMe's life insurance calculator takes the guesswork out of the equation, and accounts for the nuance mentioned above.

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 details on your income, family, housing costs, savings, existing coverage and 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.

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

You can then 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.

3. Add up your financial obligations & assets

You can also run through these calculations yourself. 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, make sure to consider the following:

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.

4. DIME method

The DIME (Debt, Income, Mortgage, Education) method for life insurance is a good starting point for your life insurance calculation. DIME estimates how much life insurance you’ll need by considering these four factors:

The catchy acronym makes it easy to remember. But it leaves out majorly important variables like:

• Your spouse’s income
• Shared assets
• Any existing life insurance coverage

This means the DIME method for life insurance 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. 

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.

Commenters recommend taking 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 most suitable amount of coverage. 

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 life insurance calculation comparing your assets, debts and obligations; present and future.

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

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

He recommends getting an affordable term life insurance policy for 10-12 times your annual income, before taxes, similar to the Government of Canada’s method of calculation. 

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.

Take note

While this is solid advice for some, it assumes your beneficiaries are savvy investors able to achieve these types of gains. That’s not necessarily true for all families.

It also ignores any assets you have, so you might even be getting much more coverage than you need.

Factors that impact how much life insurance you need

When choosing a life insurance coverage amount, you need to consider your family’s current and future expenses, alongside your income and assets. 

Here are four deciding factors to consider:

• The size of your family: The number of people in your household affects the amount of coverage you’ll need. Generally speaking, the larger the family, the higher the coverage.
• Your current and future dependents: Note all existing and future dependents, like your children, elderly parents, and anyone else that may depend on you in the future.
• The value of a stay-at-home parent: Even if your spouse doesn’t take home an income, they bring value in other ways. Think of the added expenses you would incur if that spouse were to pass. Things like childcare costs and household management.
• Your health and age: Typically, you’ll need less life insurance as you age. In the best-case scenario, you’ll have paid off most of your financial obligations when your kids reach adulthood.

Each of these factors, along with your current and future financial obligations, will help you determine the best life insurance for your situation. 

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

Apart from the payout amount, the other decision that you will have to make when buying life insurance is whether to go with a term of whole life policy. 

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

How much term life insurance do I need?

Term life insurance offers 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.

To figure out how much term coverage you need, add up your assets and compare 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 quote in seconds below. You can apply online in minutes and do it all on your terms without pressure or upselling.

How much whole life insurance do I need?

Whole life insurance covers your entire life. Because of the extended duration of coverage, whole life insurance is more costly. In fact, premiums can be anywhere 7.5 times more expensive than a similar term life policy. 

But despite the cost, it may make sense for some individuals. 

The amount of whole life insurance you should purchase depends on how much you want to leave to your beneficiaries as an inheritance. No medical exam life insurance is also ideal for those who have a history with medical issues.

Take note

The average Canadian generally doesn't need whole life insurance. This is especially true if you expect your loved ones to become independent and have enough to cover your end-of-life expenses in the future.

How much life insurance do I need for my spouse?

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

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' individual applications.

‎PolicyMe offers a discount for the first year of premiums for both applicants for two individual term policies.

How much life insurance do I need for my child?

Many parents consider life insurance for their child as an extra layer of protection. 

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

Providing protection for our customers and their loved ones is why we started PolicyMe.

One way that we put families first is through free coverage for kids at no extra cost. This means that if you get a life insurance policy from PolicyMe, you are automatically covered for $10,000 per child. 

How much life insurance do I need in retirement?

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. 

‍However, 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

‍To determine if you still need life insurance in your senior years, compare the value of your assets to those of your debts. This is the starting point to help determine the amount of life insurance you need. 

But remember—that purchasing life insurance at retirement age will likely cost much more than in your 30s to 40s. 

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.

At that age, being prone to illnesses is natural. For this reason, it may be worthwhile to purchase a life insurance and critical illness policy.

Real-life example: Brandon in Windsor, ON

Let’s look at a real-life scenario that outlines how one Canadian family calculated how much life insurance they needed. 

• Name: Brandon, a 35-year old Manufacturing Engineer living in Windsor, Ontario. 
• Family: Married with two kids, aged five and three. 
• Goal: He wants to make sure that his family is financially protected if he’s no longer there to help.

Financial obligations: Mortgage, childcare costs, and monthly education savings payments

Here’s how this couple would calculate their life insurance requirements:

• Income replacement: Brandon 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: The couple has an outstanding mortgage balance of $100,000, and 10 years remaining.
• 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.

Next steps: how much life insurance do you need?

1. Run through the calculation process outlined above to determine how much coverage you and your family need. 
2. If you’re not sure where to start, use our life insurance calculator.
3. Once you’ve determined your ideal coverage amount, shop around for quotes from reputable insurance providers.
4. When you’ve found a coverage and premium price point that works for you, apply for coverage.
5. Review the documentation thoroughly and sign your policy agreement.

FAQ: How much life insurance do I need in Canada?

You need facts, not fluff. Our goal is to provide you with honest, trustworthy information to help you make informed decisions. While our content is created with insurance experts, it is for educational purposes only and should not be considered definitive professional financial advice.

We recommend seeking the counsel of a licensed financial advisor before making any decisions regarding insurance or personal finance.

The prices listed in this article have researched and fact-checked with both internal and external sources. Prices are based on publicly available rates as of March 2023.

Our sources:

How much to save for education. Knowledge First Financial. https://knowledgefirstfinancial.ca/how-much-to-save-for-education/