The (admittedly unhelpful) answer to this question is: it depends. There is no hard and fast rule regarding how much life insurance someone should have as it’s a function of his or her financial situation, current and future financial obligations, and, of course, budget. That said, this article is intended to provide a 3-step framework to help you perform your own needs analysis.

As you’re reading through it, keep in mind that life insurance isn’t an all-or-nothing thing – even if you can’t afford to buy as much as you need, leaving something for your loved ones is certainly better than leaving nothing.

Let’s get started…

Step 1: Your Current and Future Financial Obligations

A starting point for the analysis is to estimate your current and future financial obligations. Some of the common categories of obligations include:

  • Children: A common estimate of the cost of raising a child in Canada until age 18 is ~$250K per child. And that doesn’t factor in college or university expenses which can range from ~$7K per year for Canadian universities to over $50K per year if you want to send your children south of the border (and those figures are just the cost of tuition – living expenses can be an additional $10-20K per year). For many people, this category is their largest financial obligation and the driver for buying insurance in the first place.
  • Outstanding mortgage and other debts: If you currently have a mortgage or car loan, you may want to consider having your life insurance amount cover these so that your family can continue to own and benefit from them free and clear in the event of your death. Similarly, you probably will want to have enough to cover credit card debts (especially if they are joint), student loans (particularly if they have a co-signor), and other similar obligations.
  • Aging parents (and other dependents): With baby-boomers now well into their retirement years, you may soon be in a situation where you have to contemplate how your parents or grandparents will be taken care of if you pass away. Retirement and assisted living can range in cost from $20K per year to over $50K per year. Average life expectancy in Canada is about 82 years and has been increasing steadily (though it may be prudent to plan for longer than average).
  • Cost of living: You may want to leave your family with an amount to cover their living expenses (utilities, gas, clothing, rent, etc.) for a number of years. Think about how much (either as a dollar amount or as a percent of your income) your family would need annually and for how many years, and subtract any survivor benefits from CPP/QPP or other pension plans. Be mindful of not double-counting here – for example, if you’re including a mortgage or car payoff amount in your financial obligations analysis, don’t include those payments in the living expenses (though you should include things like maintenance expenses and property taxes). Similar point for an education fund – if you’re already including an education amount in your financial obligations analysis, no need to include an education savings component in this section.
  • Final expenses: This category includes items such as funeral costs, which can range from $5K to over $15K, as well as probate fees, taxes due upon death, etc.

Step 2: Your Assets & Existing Life Insurance

Now that you’ve estimated your financial obligations (which, if you’re like most, is probably higher than you expected), let’s take a look at your assets and insurance.

  • Assets: This includes cash in your savings, checking and investment accounts, the value of your home and other real estate, and other assets. You may or may not want to factor in expected growth…for example, if you expect your salary to increase, that might mean your savings will increase more quickly. Be cautious of being too aggressive with your growth estimates…unlike your obligations which will persist even after your death (which is the reason to buy insurance in the first place), your future assets are dependent on your continued ability to earn.
  • Existing life insurance: You may already have some life insurance in place. A common source is your employer – many employee benefit plans include a death benefit (though, more often than not, it is insufficient on its own to cover an individual’s insurance needs). CPP/QPP also offers a one-time death benefit of up to $2500.

Step 3: Your Life Insurance Need

The amount of life insurance you need is the difference between your estimated financial obligations from step 1 and your estimated assets & existing insurance from step 2.

You likely have already realized that your life insurance needs will likely change over time. For example, a 30-year-old mom or dad who has two young kids at home, a mortgage and a relatively small nest egg will have a very different need than an older individual whose kids are already in college, mortgage is almost paid off, and who has been saving for a number of years.

Mosaic Life

With Mosaic Life, Canadians can get affordable and uncomplicated term life insurance in as little as 10 minutes, all online. Mosaic Life is flexible – it’s easy to add or remove coverage as your life insurance needs change. We’ve created an online calculator to help you determine your life insurance need. Or, if you already know how much insurance you need, click here to get a quote.