How Much Life Insurance Do You Need?

Start with what the payout actually has to do

Before you think about a dollar figure, think about the job the money needs to do. A life insurance payout generally needs to cover some combination of: paying off debt so it doesn't fall to your estate or co-signers, replacing your income for a set number of years, covering future costs like childcare or a child's education, and paying final expenses.

• Debt: mortgage balance, car loans, lines of credit, and any co-signed debt
• Income replacement: what your household would lose without your paycheque, for as many years as your family would need support
• Future obligations: daycare, RESP contributions you were planning to make, a spouse's reduced ability to earn while raising kids alone
• Final costs: funeral expenses and any probate or legal costs your estate would face

If you have no dependents and no debt, this list can be very short. If you're the primary earner for a young family with a mortgage, it adds up fast.

A simple starting formula: income replacement plus debt

A widely used rule of thumb among advisors is to aim for roughly 10 to 15 times your annual income, though this is just a starting point, not a target that fits everyone. A more precise version — sometimes called the DIME method — adds up four things: Debt (excluding the mortgage, which is usually counted separately), Income you want replaced (annual income times the number of years your family would need support), Mortgage balance remaining, and Education costs for your kids.

Add those four together and you get a working estimate. From there, subtract savings and investments your family could actually draw on, and subtract any existing life insurance coverage you already have, including group coverage at work. What's left is roughly the gap a new policy needs to fill.

This is a planning exercise, not a formula with one right answer — two households with identical incomes can land on very different numbers depending on how many years of income replacement they want and how much of their debt they'd want paid off outright versus paid down over time.

What pushes your number up or down

A few factors matter more than people expect. A stay-at-home parent's death can be as financially disruptive as a working parent's, once you price out full-time childcare — don't assume only the higher earner needs coverage. Young children mean a longer income-replacement window than teenagers do. A large mortgage or significant co-signed debt raises the number quickly, while a paid-off home lowers it.

On the other side, a healthy emergency fund, non-registered investments, or a spouse with strong independent income can reduce how much new coverage you need. So can existing coverage: check what you already have through work, a mortgage life insurance rider, or an older personal policy before assuming you're starting from zero.

It's also worth separating your registered accounts from the picture. A TFSA, RRSP, or FHSA balance can help your family bridge a gap, but these accounts weren't built to replace decades of income the way a term policy can, and RRSP withdrawals by a beneficiary can trigger tax consequences depending on how the estate is structured.

Term vs. permanent affects how you think about the number

Most people covering a temporary need — a mortgage, the years until kids are independent — are well served by term life insurance, which is coverage for a set period at a lower cost than permanent insurance. Because it's cheaper per dollar of coverage, term insurance makes it realistic to buy the full amount your DIME calculation suggests.

Permanent (whole or universal) life insurance costs more but lasts your entire life and can build cash value, which is a different tool aimed at estate planning or lifelong dependents rather than temporary income replacement. Many households use term for the bulk of their coverage and consider permanent insurance only for a specific, narrower purpose.

Whichever type you're weighing, this article is general information, not a recommendation to buy a specific policy or from a specific insurer — a licensed insurance advisor can run your numbers against actual product quotes.

Revisit the number, don't just set it once

Your coverage need isn't static. A new mortgage, a new child, a spouse leaving the workforce, or paying off your debt are all reasons to recalculate. Many households simply let coverage lapse or shrink as term policies expire, without checking whether the underlying need actually went down.

A reasonable habit is to revisit the calculation every few years or after any major life event, using the same debt-plus-income-replacement approach, and adjust your policy up or down rather than assuming the number you picked at 30 still fits at 45.

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