How much life insurance do I need?


Have you ever asked yourself, “How much life insurance do I need?” If you’re reading this article then you’re likely curious and you’ve come to the right place. Let’s start off with a background of what life insurance is before we get into how much you need.

Life insurance is a contract between you (the policyholder) and an insurance provider (the insurer) that guarantees your beneficiaries (i.e., the individuals and groups who will receive the money) a lump sum payment upon your death.

If something happens to you, your beneficiaries will receive a cheque from the insurer in one, tax-free lump sum. They can use the money any way they wish – for example, life insurance can help your loved ones:

  • Pay off the mortgage
  • Top up retirement savings
  • Take time off and use the money as monthly income
  • Put the kids through school
  • Renovate or buy a cottage

It’s up to them. Thanks to you.

Man looking confused in front of laptop

So how much life insurance do I need?

Figuring out the magic number is a simple matter of ensuring you never have too much or too little coverage. Think about your current lifestyle and the lifestyle that you’d like to leave behind for your loved ones. Do you have a large mortgage? Do you have children or dependents that need support? Are you using life insurance as a financial planning vehicle? All of these questions can help you determine how much coverage you will need. And in case you’re wondering, you’re never too young to have life insurance.

Two standard ways to determine how much coverage you need

The options below give you a rough estimate of the amount of life insurance you may need today. For a more detailed estimate, try our life insurance calculator to find out how much you’ll need in only three 3 easy steps.

Option 1. The ‘ten times salary’ rule

Right now, your income is paying all or a portion of your household bills. If something happens to you, your family may have to make radical lifestyle changes that could include having to sell assets, downsize, or put off plans for post-secondary education.

Ideally, you would purchase the equivalent of at least 10 times your annual salary to give your family every advantage to carry on with confidence. If you can’t afford that much life insurance coverage right away, start with at least six times your annual income and adjust the coverage when you can.

Doing the math
  • If you earn $80,000 a year after tax, you would need: $80,000 X 10 = $800,000.
  • The minimum coverage you should consider is six times your annual salary: $80,000 X 6 = $480,000

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Option 2. The ‘years to retirement’ rule

What if you have less than ten years between now and retirement? In this case, estimate the number of working years between now and retirement. That’s the income you need to replace with a life insurance policy.
This should be considered the minimum amount of coverage you need. There’s nothing stopping you from purchasing additional life insurance coverage, especially if you want to give your kids or grandchildren a financial leg up.

Doing the math

If you earn $80,000 after tax, multiply that amount by the number of years between now and retirement.

  • 5 years to retirement: $80,000 x 5 = $400,000
  • 8 years to retirement: $80,000 x 8 = $640,000

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Types of life insurance in Canada and what they cost

Life insurance policies fall into two categories in Canada: term life insurance and permanent life insurance (also called whole life insurance). They both offer great coverage and help you protect your loved ones, but there is a cost difference.

Option 1. Term life insurance

Think of term life insurance as a “pay-as-you-go” option. You can buy insurance in pre-set increments (called terms) so that you have insurance when you need it most. For example, you will likely want a lot of coverage from age 30 to 60, when you have the greatest financial responsibilities and replacing your income is vital to your family’s protection.

But you may wish to reduce your coverage at age 60 when you have fewer debts. Find out if term life insurance is right for you.

What it costs

Term life insurance is less expensive than permanent life insurance because it has an expiry date. This lowers the risk to the insurance company and results in more affordable premiums (i.e., the amount you pay for an insurance policy). The cost is based on your age and health.

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Option 2. Permanent life insurance

Think of this type of life insurance as a lifetime of protection. It’s called “permanent” because as long as you pay all the insurance premiums, it stays in effect for life. This type of coverage is commonly purchased when a financial planner and insurance expert have agreed that the lifetime advantages outweigh the “pay-as-you-go” approach described above. Learn how to protect your future with affordable whole life insurance.

What it costs

Permanent life insurance gets paid off over several years. Once the policy is paid for, it stays in effect for life. It costs more because the insurance company knows that it will have to pay out in the future. However, for families with complex estate planning needs, this type of coverage includes a way to generate investment growth and often pays for itself in estate tax savings.

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Next steps

Knowing how much life insurance coverage you need is the first step toward protecting everything you and your family are building together. Your Serenia Life advisor can help you choose the right kind of insurance with premiums you can afford. Don’t have an advisor? Fill out this short form to get the ball rolling today.

To learn more, see How does life insurance work in Canada? 


This blog post contains general information only. Because each person’s situation is unique, it is best to speak with a lawyer when engaged in estate planning. Serenia Life Financial does not advise clients on wills, trusts, powers of attorney, or legal matters.