You’ve heard of life insurance and might already have some in place. You or your parents may have bought a policy when you were younger. Or, you could have policies with your employer or life insurance for your debt, such as mortgage life insurance. Still, you might wonder, “How much life insurance do I need in Canada?” Since life in Canada is so expensive, it’s essential to consider your finances to decide how much life insurance you should carry.
Being an adult often means having ongoing responsibilities for many years. You might have debts, a mortgage, a life partner, children, or aging parents that depend on you. Eventually, you will pay off your obligations and mortgage, you and your partner may accumulate enough money for a comfortable retirement, and the kids will be independent. But what happens if something happens to you while you still have dependents and financial responsibilities?
Of course, you’ll want to make sure you look after those left behind if you pass away. So, you’ll need to calculate how much life insurance you need. Before you decide, it’s important to understand what life insurance is, how it works, why you need it, and the different types.
How To Calculate How Much Life Insurance I Need in Canada?
Everyone’s needs are different. The life insurance you need will not be the same as your neighbours, co-workers, or siblings. Your goals will be a determining factor for deciding how much insurance to buy. After all, you purchase life insurance to take care of those left behind.
Depending on your circumstances, you might want life insurance to pay off your debt, pay off your mortgage, provide income for your partner and children, or to cover the costs of your children’s education. Knowing what you want life insurance to do for your beneficiaries is the first step in the process.
A DIME to help with how much life insurance you need in Canada
DIME stands for debt, income, mortgage and education. It’s a method people use to calculate their insurance needs. Many Canadians have some type of life insurance, but it’s not enough to cover all the expenses their family may have.
If you have debt, you might want enough insurance to pay it off if you pass away. Debt can include funeral costs as well.
If, for example, you have $30,000 in debt and you expect your funeral to cost $10,000, you need $40,000 of life insurance to cover these expenses.
Income is the amount of your income you want to replace. You can calculate it in several ways, depending on your circumstances. You could use your before-tax income, your after-tax income, or the amount your family needs to live on.
Suppose you earn $60,000 yearly before taxes and deductions and net $48,000 after taxes and deductions. A standard rule of thumb for income replacement is 10 to 15 times your net income. So, if you want to replace your net income for 15 years, you need $720,000 of life insurance for this portion.
Another factor to consider with income replacement is how long your beneficiaries may need the money. Suppose your children are in post-secondary education, and you and your partner are near retirement. In that case, you might choose less income replacement than if you’re starting your career and have a toddler.
Mortgage debt is another factor when deciding how much life insurance you need in Canada. Some people are mortgage-free, while others are renters. People in these situations don’t need life insurance to pay off their mortgages.
Having a mortgage when you pass away can be devastating for your family. If you don’t have enough life insurance, your family might have to sell the home after your death. Many people will add the mortgage amount they owe to their life insurance policy to avoid this. For example, if you owe $550,000 on your home, you can add that to your insurance amount.
The last part of DIME is education. Life insurance for education is for children who may have yet to start post-secondary or who are pursuing advanced degrees. If one of your goals is to fund their education, you can add the expected amount to your life insurance policy.
One year of post-secondary education, including residence in Canada, costs approximately $17,359. If you want sufficient funds for a four-year degree for two children, you need $138,872 ($139,000) of life insurance in today’s dollars.
Calculating the amount of life insurance needed
You can deduct the amount of savings you have from the amount of insurance you need. In this example, we’ll assume you have $30,000 in savings and investments.
Adding the totals for this example and subtracting your savings, you’d need $1,419,000 of life insurance to accomplish your goals ( $40,000 +$720,000+$550,000+$139,000-$30,000). You can use this formula to adjust the amounts to your circumstances.
You can use an online calculator to help you get an idea of how much life insurance you need. Simply input your numbers, and the calculator will give you an approximate amount of life insurance required for your circumstances.
How much life insurance do I need in Canada if I’m single?
Many single people feel that life insurance is unnecessary if they have no dependents. However, as a single person, you may have aging parents who need care, nieces or nephews you’d like to provide for, or a favourite charity you’d like to leave money to.
You might have debt that you want life insurance to cover. If your debts are joint or someone has co-signed for you, such as a parent on a student loan, they will still need to make the payments if you pass away. Life insurance can eliminate those debts. You might also want to have life insurance proceeds cover your funeral costs.
How much life insurance do I need in Canada if I’m a stay-at-home partner?
As a stay-at-home partner, you may not have an income to replace, but what about the labour costs you provide? If something happens to you, your partner might have to outsource the work you do. Your partner might need to pay for services including meal preparation, childcare, cleaning, laundry, and so much more. A life insurance policy can provide the money your partner needs for services they won’t have time to do.
To calculate the life insurance you need, find out how much it costs to replace the labour you provide. This could be things like childcare, maid services or lawn care. Once you have an annual total, multiply it by the years your partner might need to pay for these.
You can also use the DIME formula to calculate the life insurance you need. You might want any debts you have paid off, money for your funeral, income to replace your labour at home, your mortgage paid off, and to provide an education fund for your children.
Types of Life Insurance in Canada
Once you’ve settled on how much life insurance you need in Canada, it’s time to explore the most common types of insurance policies available. Once you’ve researched, you can decide which type of insurance is best for you.
Four common types of life insurance in Canada are creditor, workplace, term, and permanent. Each has its unique features. You can have one or a combination of different types.
Creditor Insurance in Canada
Many creditor products offer life insurance. You can purchase life insurance on your mortgage, line of credit, credit card, and loans. If you have creditor insurance for any borrowings, you’ve probably noticed they are expensive.
Another possible drawback is they typically restrict the amount they’ll pay out. In some cases, it may pay an outstanding balance in full. However, it may only pay the average balance of the last twelve months or a partial amount.
The policy proceeds don’t go to your beneficiaries because the lender usually receives the funds to repay the loan. The amount of insurance is limited by the amount you borrow.
Despite their drawbacks, many people take creditor insurance because signing up for it is easy. Sometimes, it’s the only life insurance the borrower has.
Life insurance through your employer is usually part of your employee benefits package. The amount of life insurance will vary from employer to employer, but it’s often one or two times your annual salary. Some employee benefits packages allow you to increase the amount, but you may have to pay for additional insurance.
Having life insurance at work is a great perk but has limitations. When you calculate how much life insurance you need in Canada, you may realize your policy from work doesn’t provide enough coverage to meet your needs.
Workplace life insurance is specific to your employer. If you leave your employer, you’ll no longer have life insurance with them. Starting a new job may provide you with life insurance at work again, but you often have to wait three months before the policy is in effect. If your only life insurance policy is through your employer, you could be without life insurance for a time if you no longer work there.
Term insurance is an amount of insurance you buy for a specific period. It can be for as little as a year or as long as 30 years.
In our previous example, you might need 1.4 million dollars of insurance for only part of your life. If you have small children and 20 years left on your mortgage, you may want a 1.4 million-dollar policy for 15 or 20 years. At the end of the policy term, you expect to be mortgage free and your children to have completed school. So, your insurance needs could decline significantly.
Term insurance has several advantages. It’s often cheaper than other insurance options. You can renew it when the term expires, although the premium will be higher. You can choose the amount and term that suits your needs. The policy proceeds typically go to your beneficiaries as a tax-free inheritance they can use however they like.
A permanent life insurance policy is in effect until you pass away, cancel or surrender the policy. They have a death benefit and a cash component, meaning they can serve as an investment and life insurance product. The additional features that permanent insurance offers result in significantly higher monthly premiums than term insurance.
There are two types of permanent life insurance: universal life insurance and whole life insurance. They are similar but not the same. The following chart compares the main features of universal, whole life and term insurance:
|Type of life insurance||Term||Universal Life||Whole life|
|Amount of Coverage||You choose the policy amount.||You choose the policy amount.||You choose the policy amount.|
|Type of Coverage||Death Benefit.||Death Benefit.||Death benefit.|
|Length of Coverage||For the term and you can choose to renew.||For life.||For life.|
|Guaranteed Returns on Investment Component||No-no investment component.||No.||Yes.|
|Investment Management||No investment to manage.||You manage the cash component of your life insurance policy.||The insurer manages the investment component.|
|Taxes||Beneficiaries receive a tax-free payout upon your death.||Beneficiaries receive a tax-free payout upon your death.|
The investment portion typically grows tax-deferred.
|Beneficiaries receive a tax-free payout upon your death.|
The investment portion typically grows tax-deferred.
|Premiums||Usually fixed for the term. Premiums normally increase if your renew your policy.||Higher premiums that term insurance. Premiums can be flexible.||Premiums are usually fixed for the life of the policy.|
|Cash Value||None.||Yes but not guaranteed.||Has a guaranteed cash value.|
|Withdrawals||No cash to withdraw.||Policyholders can withdraw cash from the policy based on the cash value.|
Cash value can be used as collateral to secure a loan in some cases.
|Policyholders can withdraw cash from the policy based on the cash value.|
Cash value can be used as collateral to secure a loan in some cases.
Getting The Life Insurance You Need In Canada
Knowing you have enough insurance to protect your family if something happens to you can give you a sense of relief and peace of mind. Before purchasing a policy, research to know you’re getting the right amount and policy at the right price. You can get information online or talk to a broker or agent. Remember, too, that if you have a policy that no longer meets your needs, you can adjust it to cover you fully.
FAQs About How Much Life Insurance Do I Need in Canada?
You can calculate the amount you need using the DIME formula. Determine the amount of debt you need insurance to pay off, including your funeral, the amount of income you need to replace, if you have a mortgage to pay off, and if you need to provide funds for post-secondary education. You can use an online life insurance calculator to help you with this.
You can increase your coverage if your needs change. Talk to your policy advisor to see if you can increase your existing policy. Another option is to shop for an additional policy if you can’t or don’t want to change the policy you have. Determining how much extra life insurance you need and how long you need it before you make changes is important.
The average amount of life insurance in Canada is $458,000 per household.
The maximum limit of life insurance will vary between companies. Some companies offer policies as high as 1.5 million dollars. You can get additional policies at different companies if you need to increase the amount.
There are different ways to calculate income replacement for life insurance. General advice for income replacement is a policy that covers 10-15 times your annual income. You can use your pre-tax or after-tax income. If you earn 60k before taxes, your policy could be as high as $900,000 for income replacement. If you make 60k, but your after-tax is 48k, you could get a policy for $720,000.
Before deciding on an amount, calculate the expenses you anticipate your beneficiaries will have to cover, such as housing, utilities, savings, transportation, etc. and get a policy that provides that amount per year of the number of years your loved ones will need the money. For example, you may calculate they need 4k per month for 12 years. In this case, the income replacement you’ll need is $576,000.
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