How Much Life Insurance Do You Need?

How Much Life Insurance Do You Need?

If you’re in the market for insurance coverage, one question that’ll be on your mind is, “How Much Life Insurance Do You Need?” Several factors are crucial in the overall amount you’ll need for life insurance in Canada.

Determining how much life insurance coverage you need can seem complicated. You can answer the question, “How Much Life Insurance Do You Need?” by doing some simple math based on your family’s finances and goals.

The right amount of coverage provides a safety net, so your family has help covering expenses and meeting financial obligations if you pass away.

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The right coverage amount and policy type take care of their ongoing needs and help ensure your children have bright futures filled with possibilities.

How much life insurance coverage do you need?

To fully answer the question “How much life insurance do you need?” there are several things to consider. To determine the right amount of life insurance, add up the money your family would need if you died tomorrow, including:

  • Paying off debts like mortgages, car loans, student loans, credit cards, etc. Calculate the outstanding balances still owed.
  • Funding college savings for children to cover expected future tuition. Estimate costs based on current rates.
  • Replacing your income for a set period, like 10-20 years. Consider your annual salary minus your spouse’s income.
  • Covering funeral and burial expenses. The average funeral costs $6,000-$12,000
  • Funding childcare expenses while the surviving spouse returns to work. Calculate yearly costs of regular childcare.
  • Ensuring savings for retirement and emergencies are maintained. Estimate target amounts based on financial goals.

Add the necessary amounts for each of these needs the insurance payout would cover. This gives you a target number to aim for in your total life insurance coverage limits.

Most experts recommend 10-12 times your annual income as a reasonable estimate for coverage to replace income and cover significant debts like a mortgage. The Comparewise online life insurance calculator can help estimate needs as well.

How to calculate how much life insurance you need online

Adequate knowledge of life insurance coverage is needed to answer the question, “How much life insurance do you need?” Most insurance companies and independent websites make it easy with their online live calculator.

In just a few minutes, you can get an estimate of how much life insurance you may need to protect your family. To use one, you can:

  • Go to the website’s calculator section, like the one you’ll find on Comparewise.
  • Select “Life Insurance Calculator”
  • Enter your date of birth and gender.
  • Input your desired coverage amount or click the link to get an estimate based on your income.
  • Answer a few questions about your health, lifestyle, family members, debts, and assets.
  • Select any optional add-ons like disability insurance or critical illness coverage.
  • Enter your contact info to receive quotes by email.
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After submitting your details, you’ll get an instant estimate of potential life insurance costs based on the coverage amount you indicated. The calculator factors in your age, health, lifestyle, obligations, and additional options to provide customized pricing.

Within minutes, you’ll have quotes from many top-rated insurers emailed to you, making it easy to compare rates. Quotes are valid for as many days as the insurance company deems fit, in case you want time to review options.

Other tips to help you get accurate estimates

Here are some other tips to get a more accurate answer to the question, “How much life insurance do you need?”

  • Most insurance calculators provide ballpark life insurance estimates based on limited input details. For a more accurate calculation of your specific needs, contact the company to speak with an advisor. They’ll gather an in-depth understanding of your financial situation and goals.
  • Their advisors have expertise in analyzing obligations like mortgages, loans, college savings, income replacement, and final expenses. They determine an appropriate amount of coverage considering your existing assets, debts, income, dependents, and more.
  • Insurance advisors explain all available policy types and features as well so you understand the options. Getting professional advice ensures you purchase adequate, affordable life insurance tailored to your family’s needs.
  • Rather than guessing how much coverage you need, leverage an easy online calculator for an initial estimate, then speak to an advisor for a detailed analysis. Within minutes, you can be on your way to protecting your loved ones with life insurance.
How Much Life Insurance Do You Need - comparewise

Why you need life insurance

Below are some reasons why it is crucial to set up a life insurance:

  • Life insurance is vital in securing your family’s future, ensuring your loved ones are financially secured when you pass away. The right amount of coverage provides a valuable safety net, helping your family maintain financial stability.
  • With adequate life insurance, families can avoid struggling to cover even basic living expenses when losing an income. Outstanding debts like mortgages and loans also burden survivors, potentially causing significant financial distress.
  • Life insurance proceeds supply needed cash flow to replace lost income for a period of years. This gives your spouse or partner time to adjust and grieve without immediately having to return to work or make drastic lifestyle changes. The funds repay debts, so your family retains assets like your home.
  • Additionally, life insurance helps ensure your children’s education continues undisrupted. The payout can fund college savings, but you may still need to finish building. It helps cover your children’s regular expenses as they transition into adulthood.
  • Life insurance can also prevent erosion of the retirement nest egg and investments you worked so hard to accumulate. Your family can use the payout to maintain their lifestyle without liquidating your retirement accounts or other assets you intend to grow over decades. This prevents significant drawdowns.
  • Life insurance provides money for final expenses without burdening loved ones. Funerals, burials, and outstanding medical bills can total $10,000 or more.

Having adequate life insurance gives you peace of mind, knowing that your family will maintain financial stability even after you’re gone.

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Factors that affect how much life insurance you need

When answering the question “How much life insurance do you need?” your specific financial situation determines how much coverage makes sense. Consider:

  • Income: Higher incomes require more coverage to replace.
  • Debt levels: The higher your debts, the more coverage you need to pay them off.
  • Number of children: More kids mean higher college savings and childcare costs.
  • Spouse income: A working spouse lowers the needed family income replacement.
  • Retirement savings: Inadequate savings increase the amount of insurance required.
  • Other assets: Existing savings, investments, and real estate provide a financial cushion.
  • Health issues: Coverage gets much costlier as you age or develop medical conditions.

Re-evaluate your target coverage amount every few years as your situation changes. Certain life events like new children, more debts, or new health issues alter the balance.

Having an independent insurance agent calculate your needs is wise. Agents have expertise in assessing financial situations and can explain all available policy options.

What factors impact the cost of coverage?

Life insurance premiums vary significantly based on:

  • Age and health – Younger, healthier applicants get lower premiums.
  • Term length – Longer terms, like 20 years, cost less than shorter 10-year policies for the same amount of coverage and are the most cost-efficient.
  • Type of Insurer – Direct insurers without agents offer competitive rates, usually lower than legacy companies.
  • Lifestyle factors – Risky hobbies like smoking, and family histories increase premiums.
  • Regular medical checks – Evidence of continuing good health can lower premiums
  • Policy type – Permanent insurance costs more than term.
  • Group policies – Leverage bulk discounts from employers or associations.

Comparing quotes from multiple top-rated insurers ensures you find an affordable policy that meets your coverage needs and budget. This will help answer the question, “How much life insurance do you need?”

Types of life insurance policies

Once you have an estimate for required coverage, selecting the right policy is vital. Two main types exist:

  • Term life insurance: Term Life Insurance provides coverage for a set period, like 10 or 20 years. Its premiums remain steady over the term and only pay out if you die during the term. It also provides the best pure death benefit protection for your money, and it is the most affordable way to get a large amount of protection. Those on a budget aim for the cheapest term policy with sufficient coverage limits and a longer term.
  • Permanent life insurance: Permanent policies make sense if you have extra income to invest and want lifelong coverage plus tax advantages. Many purchase small permanent policies plus larger term policies for maximum protection as permanent policies your entire life and accumulate cash value. Its premiums are higher, but it acts as an investment. Types include whole, universal, and variable life insurance.

An independent broker can outline the pros and cons of different policy types based on your budget and goals.

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Can I cash out a life insurance policy? 

Most term life insurance policies only pay out if you die during the term and have no cash value to cash out. However, permanent policies like whole life insurance accrue cash value that you can access in specific ways:

  • Policy loans – You can borrow against a percentage of the cash value, using the policy as collateral. The loaned amount earns interest.
  • Partial surrenders – You can withdraw a portion of the cash value, reducing the death benefit. Taxes and fees apply.
  • Full surrender – Cancelling the policy lets you cash out the full cash value amount, ending your coverage. Surrender fees often apply.
  • 1035 exchange – Roll over funds directly from one permanent policy to another to access cash value while maintaining coverage.

Consult your insurer about options to tap cash value without ending your policy. Consider the impact withdrawals have on long-term policy performance.

Alternatives to traditional life insurance

Beyond typical life insurance, other financial tools and assets may provide your beneficiaries support:

  • Employer group insurance – Many employers provide group life insurance, often 1-2x your salary.
  • Spouse’s life insurance – Ensure your spouse or partner has adequate coverage, too.
  • Savings – Build your retirement savings, emergency fund, and RRSPs to supplement any insurance payout.
  • Investments – Assets like stocks, mutual funds, and real estate can be sold by family if needed.
  • Mortgage insurance – Consider mortgage life insurance to pay off a home loan.
  • Funeral insurance – Small policies cover final expenses, not income replacement.

A diversified financial portfolio reduces the required size of your life insurance policy. Still, insurance remains essential for debt coverage and steady income replacement.

Conclusion on how much life insurance do you need

Determining adequate life insurance coverage entails carefully examining your financial obligations and goals to protect your family’s future.

This requires that you look closely at debts that need repayment, income that needs replacing, child costs, and other obligations your family would face upon your death. While needs vary based on income, debts, children, and savings, 10-12 times your salary is an appropriate rule of thumb.

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FAQs about how much life insurance do you need

How do you determine how much life insurance you need?

Aim for a benefit amount that covers 10-12 times your gross annual income as a basic rule of thumb, then add coverage to pay off all debts, fund college savings, replace lost income for 10-20 years, cover final expenses, and maintain savings. An independent agent can help calculate needs, and you can also use online calculators to estimate, then meet with an independent insurance agent who can analyze your financial situation in detail, including debts, income, children, assets and obligations, to accurately determine appropriate coverage limits.

Can I get life insurance if i have pre-existing health conditions?

Yes, insurance is still available for health issues, but the premiums will be higher. Certain types of no-medical exam policies make approval easier for some pre-existing conditions like diabetes or heart disease. Talk to an independent broker about options.

How can i get the most coverage for the lowest cost?

Focus on buying basic term life insurance, which provides the most cost-efficient protection. Get quotes from at least 5 top direct insurers and choose the most affordable 20 or 30-year term policy that meets your coverage needs. Apply when young and healthy.


November 14, 2023
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