Homeowners
Decide whether the payout should clear the mortgage or leave your family the choice. See lender coverage vs your own term policy.
Life Insurance Needs
How Much Life Insurance Do I Need?
Add up what your family would need, subtract what is already in place, and the gap is your estimate. Here is the method step by step, with an illustrated example.
The Method
How do I work out how much life insurance I need?
Add up five needs, then subtract what would already be in place. What's left is a starting estimate of the coverage to buy.
Income replacement
Estimate the take-home income your family would need each year, and for how many years, such as until your youngest is independent. Use take-home pay, because a death benefit is generally tax-free.
Debts
List what you'd want cleared: car loans, lines of credit, credit cards and any tax owing.
Mortgage
Use the current balance if you want the home paid off. If you'd rather leave the mortgage in place, cover the payments in step 1 instead, not both.
Education
Set an amount for each child, less any RESP savings you're confident will be there.
Final expenses
Funeral, legal and estate costs, plus tax. What's left in an RRSP or RRIF is generally taxed as income on the final return unless it passes to a spouse.
Existing and group coverage
Subtract personal policies, group coverage you can rely on, and savings your family could use.
Worked Example
An illustration: what does this look like with numbers?
This is an illustration only. The family and the round numbers are made up, and it is not a recommendation or a typical amount.
| Illustration only | |
|---|---|
| Income: $60,000 a year for 15 years | $900,000 |
| Mortgage balance | $400,000 |
| Other debts | $25,000 |
| Education for two children | $50,000 |
| Final expenses | $25,000 |
| Total needs | $1,400,000 |
| Less personal policy | $100,000 |
| Less group life through work | $150,000 |
| Less savings the family could use | $50,000 |
| Estimated gap | $1,100,000 |
Leave out the group coverage and the gap becomes $1,250,000, which shows how much depends on a benefit tied to one job. This simple version also ignores inflation and any investment growth on the payout. A closer estimate would consider both.
Group Coverage
Should I count my group life insurance?
Count it with care. Group life is often one or two times salary and usually ends when you leave the job or retire, so it may not be there when your family needs it.
Many plans let you convert to an individual policy without medical evidence, but usually only within about 31 days, with limits on the amount. Coverage you own stays with you. Our life insurance page explains the options.
Choosing Coverage
What kind of coverage should fill the gap?
Match each need to how long it lasts. Income, mortgage and education needs end, so term life insurance usually fits. Final expenses and estate tax last, so permanent coverage may fit.
In the example, the family might use term for most of the gap and a smaller permanent policy for final expenses. Often a combination does the job.
Your Situation
What changes the number?
Couples
Run the numbers for each of you. A spouse without a paycheque may still provide child care and household work that would cost money to replace.
Business owners
Keep personal and business needs separate. Personal guarantees go on your list. Key person and buy-sell needs are sized with the business and your accountant.
When It May Not Fit
When this method may not fit
This method suits families who depend on your income. If nobody does, your debts are small and your savings would cover final costs, you may need little or no coverage.
It's too simple for a blended family, a dependant with lifelong needs or a large tax bill at death. Those call for a closer look with your accountant and lawyer.
Staying Current
How often should I review my coverage?
Review it when life changes: a new home, a child, a business or retirement. A number that was right five years ago may be too high or too low today.
Do the same check before you let a policy end, so you know what you are giving up.
Common Questions
Questions about how much coverage you need
Some people use a multiple of income as a quick check, but it ignores your debts, your children and the coverage you already have. Working through the steps gives you a number tied to your family.
It can. Some families want the home clear. Others would rather keep the mortgage and have the cash. If you include the balance, don't also count the payments in your income need.
Often, yes, if the household depends on what each of you earns or does. The amounts can differ, so run the numbers for each person.
Count it only with care. It usually ends when you leave the job or retire, and the amount is often one or two times salary.
If the need runs for many years, it helps to. The same dollars buy less over time, which is one reason to review your coverage as life changes.
Start with what your budget allows. Term generally costs less to start, and you can add coverage later if you still qualify. Part of the amount is still useful to your family.
We work with clients across Burlington, Oakville, Milton, Mississauga and Hamilton. Many first conversations start with a call to 289.339.8100.
Related Guides
Strategies that often work together
Term Life Insurance
How 10, 20 and 30 year terms work, plus renewal and conversion.
Read the guideWhole Life Insurance
Lifetime coverage with cash value, and who it fits.
Read the guideLife Insurance
Term, permanent and critical illness coverage, what drives the price, and options after 60.
Read the guideThis information is general in nature and is not tax, legal, accounting, insurance or investment advice. It is based on current Canadian tax legislation, which can change. Any strategy should be designed and reviewed with your accountant and legal advisors based on your circumstances. The example on this page is an illustration, not a recommendation. Coverage, premiums and group plan terms vary by insurer and policy; the policy contract governs.
Life insurance in Burlington, Oakville, Milton, Mississauga and Hamilton
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