How Much Life Insurance Do You Actually Need?

Ask the internet how much life insurance you need and you'll get one answer over and over: ten times your income.

It's a handy rule, and for some families it lands close to the mark. But it ignores almost everything that decides the real number: whether you have a mortgage, how old your kids are, whether your partner earns as much as you do, and how much coverage you already have through work.

Two people earning the same salary can need wildly different amounts. A 52-year-old with no debt and grown children may need very little. A 34-year-old with a new mortgage and two young kids may need several times more than the rule suggests.

Here's how the number is usually worked out, so you can see where yours would land. It's general information, not a recommendation: what's right for you depends on your own circumstances.

What actually has to be paid for

Life insurance exists to replace money, not to hit a multiple. So the question isn't "how much am I worth?" but "what would still have to be paid for if my income stopped permanently?"

For most Canadian families, that comes down to four things.

1. Debts that would otherwise fall to someone else

The mortgage is usually the big one, plus any car loans, lines of credit or credit-card balances. If the goal is for your family to stay in the home without the income that pays for it, the mortgage belongs in your number.

2. Income your household would lose

This is the part people underestimate. Think about how many years your family would need your income for: until the kids finish school, until the mortgage is gone, until your partner's own income would be enough.

A common starting point is your after-tax income multiplied by the number of years the money is needed. Ten years of a $70,000 take-home income is $700,000 on its own.

3. What your children's future costs

If you want to fund some or all of post-secondary education, add it. Costs vary enormously by program and whether a child lives at home, so use a figure that fits your intentions rather than a national average.

4. Final costs

Funerals, legal and probate costs, and any taxes triggered at death. This is also where people are most often surprised: registered accounts like an RRSP or RRIF are generally treated as though they were cashed out on the final tax return, unless they pass to a spouse or common-law partner (or, in some cases, a dependent child). That can create a sizeable tax bill in the year of death, and life insurance is one of the common ways to cover it.

In practice, the gap is almost always bigger than people expect. Most of the families I sit down with have one or two times salary through work and assume they're covered, and then we add up the mortgage and the years of income their household would actually need. The work coverage usually turns out to be a fraction of the number.

Then subtract what's already there

This is the step most online calculators do badly, and it's the one that keeps you from being over-insured.

Group coverage through work. Many employers provide life insurance worth one or two times your salary. Useful, but worth knowing two things: it usually ends when the job does, and it's rarely enough on its own.

Savings and investments. TFSAs, non-registered investments and anything else the family could draw on.

Government benefits. Canadians often assume these fill a bigger gap than they do. Two matter here:

• The CPP death benefit is a one-time payment of $2,500. Since January 1, 2025 there's a possible top-up of another $2,500, for a maximum of $5,000, but the top-up only applies if the person never received a CPP or QPP retirement or disability pension and leaves no surviving spouse or common-law partner eligible for a survivor's pension.
• The CPP survivor's pension is ongoing, but modest, and how much depends on the contributor's own CPP pension, the survivor's age and whether they already receive other CPP benefits.

In other words: government benefits help, but nobody should build a plan around them.

Existing policies, including any coverage attached to a mortgage.

The calculation, in one line

(Debts + income to replace + education + final costs) − (existing coverage + savings) = the gap

That gap is the amount worth insuring. Try it with your own numbers:

What people get wrong

Insuring the stay-at-home parent for nothing. If one partner does the childcare, replacing that work costs real money. Childcare, after-school care and the change in the working partner's hours all cost more than families expect.

Forgetting that the need shrinks. Your number isn't fixed. As the mortgage falls and the kids grow up, the gap usually gets smaller. That's the whole reason term insurance exists, and why the coverage you bought at 30 may be wrong at 50 in either direction.

Starting from the premium rather than the need. Beginning with "I can afford $50 a month" answers a different question from whether the household would be okay. The need and the budget are usually worked out separately, then reconciled.

Assuming it's unaffordable. Term insurance for a healthy person in their 30s is often less per month than people expect. Actual cost depends on age, health and the insurer, so a quote is the only way to know.

Not accounting for timing. Premiums are based on age and health at the time of application, so the same coverage generally costs more later, and a health change in between can make it more expensive or harder to obtain.

When someone tells me they're covered through work, my first question is always the same: what happens to that coverage the day you leave the job? My second is whether they've ever checked that the amount is actually enough for their own situation, rather than assuming it is.

A quick sanity check

Once you have a number, ask: if I were gone tomorrow, could the people I love stay in the same home, keep the same schooling, and have a few years to figure things out without money pressure?

If yes, you're in the right range. If no, the gap is where to focus.

One more thing worth knowing: in Canada, a life insurance death benefit paid to a named beneficiary is generally received tax-free, and it goes to that person directly rather than through the estate.

Where to go from here

• The calculator above will take your own numbers.
• Your group coverage at work is worth confirming: the amount, and whether it ends when the job does.
• If the gap looks significant, a free call can cover what closing it would involve. There's no obligation, and no recommendation is made before your circumstances are reviewed.

Not sure whether term or permanent makes sense for your situation? Read Term vs Permanent Life Insurance next.

Sources

• CPP death benefit, Government of Canada
• CPP survivor's pension, Government of Canada
• Life insurance, Financial Consumer Agency of Canada
• Amounts that are not taxed, Canada Revenue Agency
• Deemed disposition of property and registered plans at death, Canada Revenue Agency