How Much Life Insurance Do You Really Need? A Guide for Canadians

When it comes to life insurance, a common question is: “How much coverage do I really need?” The answer varies based on your financial situation, family needs, and goals. 

Whether buying a home, starting a family, or planning for retirement, the right amount of life insurance provides a safety net for those you leave behind. 

Let’s break down.

1. Assess Your Financial Obligations

First, consider the financial responsibilities you’ll leave behind, including:

• Mortgage payments: What’s left on your mortgage?
• Education costs: Do you want to contribute to your children’s post-secondary education?
• Final expenses: Funerals and other costs can be significant.

For example, if you have a $600,000 mortgage and $100,000 in education costs, that totals $700,000. This base amount ensures your loved ones aren’t burdened with these debts.

2. Think About Income Replacement

Next, determine who relies on your income. Life insurance should replace your income for several years. A common guideline is 5-7 times your annual salary. If you earn $70,000, aim for $350,000-$490,000. This ensures your family can maintain their lifestyle and cover expenses without financial strain.

3. Subtract Existing Assets and Insurance

If you have employer-provided life insurance or other policies, you may need less additional coverage. However, most group policies only cover 1-3 times your salary, which may not be sufficient. Also, include any savings or investments earmarked for specific goals. Subtract these amounts from your total needs, but ensure using these funds won’t compromise other financial plans.

4. Calculate the Total Coverage Needed

To estimate your coverage:

1. Add financial obligations (debts, education, final expenses).
2. Calculate income replacement (5-7 times annual salary).
3. Subtract any existing savings and insurance.

This gives you a rough idea of the coverage needed to secure your family’s future.

5. Start Small If Needed

Life insurance can seem expensive but buying what you can afford now is better than nothing. Many term policies allow conversion to permanent life insurance later, giving you flexibility as your finances improve.

6. Review Regularly

Life changes, and so should your coverage. Review your policy every few years or after major life events like marriage, having children, or buying a home. The average Canadian household has $474,000 in life insurance, but each situation is unique. Regularly adjust your coverage as your needs evolve.

Final Thoughts

Life insurance is more than a policy; it’s about securing peace of mind for your loved ones. By assessing your needs and adjusting as life changes, you can ensure your family’s financial security and your own peace of mind.