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How much life insurance do I need?

by Sam Stilson
8 min read

Everybody would love to leave a fortune for their family when they die and wonders how much life insurance is the right amount.

After all, when you’re gone, there’s going to be a giant you-sized hole in their lives. They will have lost a parent, a spouse, a sibling, a child… bummer is an understatement.

It’s natural to think that with a multi-million dollar insurance policy, if you die, at least your family will never have to worry about money for the rest of their lives. So choosing a life insurance coverage amount should be a no-brainer right? The higher, the better!

While that’s a wonderful sentiment and an admirable goal, it’s frankly, not that realistic for most people. The higher your death benefit (the payout when you die), the more expensive your premiums become. If you can’t afford to pay for your policy, your dependents will receive nothing should you end up having to cancel it.

On the flip side of that coin, you don’t want to pick too little life insurance coverage and 20 years down the road, should you die unexpectedly, your dependents might end up receiving just enough to cover your funeral expenses.

It’s quite the conundrum. So, really, how life insurance much coverage should you get?

How to determine how much life insurance you need

You probably don’t want to hear this, but the best way to get the answer to that question is to use a life insurance calculator that performs an instant audit of your personal and financial situation. By getting a clear picture of your assets and liabilities, you’ll be able to accurately make an assessment of your family’s current financial needs, and realistically estimate their future needs in a world without you.

But wait, hold on! Before you close your browser, there’s good news. We’ve built a life insurance calculator that can help you do all of that in a matter of minutes. We focus on a few key areas of your finances to keep things simple; with a little bit of math, we’re able to paint an accurate picture of the life insurance coverage amount you’d need.

How much life insurance do you need to cover your debt?

Do you owe anybody money? We’re not talking about your buddy for dinner last week, but rather substantial debts. If you die unexpectedly tomorrow, someone is on the hook for paying back any debts you owe. This is one of the main motivating factors in getting life insurance. An appropriate life insurance coverage amount gives you peace-of-mind knowing your spouse, children, or even parents wouldn’t have to deal with your mortgage payments on top of grieving your death. Though one may cancel the other out…

The primary source of debt for most Canadians is usually their mortgage. But it’s not uncommon to have balances owing on lines of credits or credit cards either.

The average Canadian carries about $8,500 in non-mortgage debt – don’t feel too bad if you’re still paying off a vacation…or two.

The sum of these liabilities can be used as a starting point for figuring out your coverage needs.

How much life insurance do you need to cover your family’s living expenses?

The next step in figuring out your life insurance coverage needs is assessing how many dependents you have and how much of your after-tax income they rely on.

A dependent is anyone who needs your financial support. If you’re the primary breadwinner in your household, have kids or plan to have kids, then you already have or will soon have dependents. You may also have elderly parents or disabled family members that depend on you financially; these people’s needs should all be considered when calculating the life insurance coverage amount.

Aside from the number of dependents you have, you’ll also want to consider the actual dollar amount they require from you annually to support them.

Does your partner earn a salary, even if you pay most of the bills and cost of living? How much rent or mortgage does your family pay? What about food, clothing, utilities, etc.? How much would they require in cash every year to maintain their standard of living?

What percentage of your after-tax annual income do you think they’d need?

Other things to consider are the ages of your children and your partner. They may only need the annual figure above for a temporary amount of time. If your children are teenagers, for instance, they may be self-sufficient in less than a decade. Figuring out the length of time they’d need financial support is a crucial aspect to calculating your coverage needs.

How much life insurance do you need to plan for your children’s education?

Tuition fees are a cost your children will likely encounter in their lives and can be accounted for by your life insurance policy. That’s why we factor in university education fees in our calculator. Just one year of tuition, books, lodging etc. can cost around $20,000 on average. It’s a major expense that might not be economically possible if your children were to lose your salary. Therefore many people account for those costs in their coverage amount.

How much life insurance do you need to provide future needs?

Life insurance is not just about covering your debts and your family’s living expenses. It can also be an opportunity for charity, or to provide financial assistance to family and friends during major milestones in their lives that you would be missing if you were to pass away. Things like a down payment on a house or condo, wedding costs for your children, or donations to charities can also be planned for with your death benefit. It’s also wise to include around $10,000 to cover expenses that aren’t really optional, such as funeral costs.

How much life insurance do you need to protect your savings?

Do you have any savings? Whether it’s a liquid investment portfolio, an RRSP you opened at 19, or wads of cash stuffed under your mattress, any assets you’ve stored away can help reduce your life insurance coverage needs.

While some people may choose to reduce their coverage amount based on their savings, others may purchase life insurance to protect their life savings. That way, their dependents won’t need to dip into savings that have been allocated for long-term growth (like investments) or sell assets (such as a home, car, etc.). Existing life insurance plans you might have should also factor into your total assets as they would likely pay out upon your death.

Have you discussed the life insurance coverage amount with your dependents? 

Crunching numbers gives you the cold, hard, facts about your family’s financial needs. But don’t forget to discuss the situation with your loved ones; talk about what they think they’d need if you were to die.

No one enjoys planning for death, but you can make a clear-headed decision if you talk everything through with those you hope to protect.

If your partner has their own income and you do not have children, a $1,000,000 policy, while incredibly supportive, might not be necessary. Whereas if you have a large family with young children who will need their cost of living met for over a decade, plus tuition fees and inheritance, perhaps $1,000,000 isn’t out of the question.

What’s the right amount of life insurance?

Once you talk things over with your family and enter your financial information into our calculator, we’re able to suggest a coverage amount you can trust matches your needs. If you‘re still not sure how much life insurance you need, that’s perfectly ok. Feel free to experiment with different coverage levels in our online tools until you find the perfect match, and read further about the right time to buy life insurance, or more in our honest guide to life insurance.

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