How Much Life Insurance Do I Need in Canada [2022]

How much life insurance coverage do I need? First time buying life insurance? Find out what you need to know!

16 Minute read

Originally published: July 7, 2022 

How Much Life Insurance Do I Need in Canada [2022]

How Much Life Insurance Do I Need in Canada [2022]

How much life insurance coverage do I need? First time buying life insurance? Find out what you need to know!

16 Minute read

Originally published: July 7, 2022

Canada Disability Insurance Guide

When buying life insurance one of the primary questions you need to ask yourself is “how much life insurance do I need?” This is really important because this amount is about determining how much of a death benefit that your beneficiaries will receive in the case of your death.  There are so many factors to consider when buying life insurance but luckily there are relatively great ways to find out how much life insurance coverage you need. Life insurance brokers use great formulas to find out the right amount of life insurance coverage you will need to protect your family and to make sure that your coverage amount can pay off outstanding debts and mortgages. In this blog we will answer your question of: “How much life insurance do I need?” We will be talking about the formulas to find out how much life insurance you need, how much life insurance coverage is necessary for your situation and more! 

Do I need life insurance? 

To put it simply, not everyone should have life insurance. Even though having life insurance is a good idea, if you don’t have a family, dependents, debts or other financial commitments, a mortgage, or a business, you might not need it. Most people who do have a family or a mortgage think about getting life insurance because it is one of the most crucial preventative measures to safeguard your loved ones from financial instability in the event of your passing. A life insurance death benefit can be used for a variety of purposes aside from safeguarding your family from financial instability, which is one of its many benefits. This money can be used to cover funeral costs, settle debts, or paying a mortgage, funding a child’s education, or simply keeping the cash on hand for savings and daily expenses. Permanent life insurance policies, for example, have a cash value that can be built up over the course of your life. The accumulated cash sum can then be put to use for investing, paying off premiums, increasing your death benefit, or boosting your retirement income. Whereas term life insurance is offered in 10, 15, 20, 25, 30 year terms, which makes it easy and affordable to provide your family with coverage when they are most vulnerable. For example: if you have a dependent kid, it would be smart to purchase a 20-25 year term life insurance policy just so they are covered in the case of your death prior to them becoming independent young adults.

If you’re unsure whether you should purchase life insurance, there are many questions you can ask yourself, including the following: Will my dependents or partner require additional financial support to be able to take care of themselves if I pass away? Does anyone else depend on me, like my siblings, parents, or grandparents? Do I want to have my mortgage paid off if I pass away? Do I want to put money aside for my kids’ education? Do I want to leave anything to my family or any charities? Do I want to pay off unpaid debts that will burden my family or lower the value of my estate? If you answered “yes,” to any of these questions, you should think about purchasing life insurance

What is a life insurance coverage amount? 

A life insurance coverage amount is the amount of life insurance you are purchasing with your policy for example: do you need a $250,000 life insurance coverage amount or a $500,000 life insurance coverage amount. This coverage amount is an extremely important factor because it determines how much your death benefit is. This amount will also affect your life insurance premiums because the higher the life insurance coverage amount, the higher the premiums. 

What is a death benefit?

A life insurance policy’s death benefit is the lump sum payment made to the beneficiary of the policy when the policy’s insured passes away. This is a payment that is not subjected to taxation

Why is life insurance coverage amount important? 

As stated earlier, life insurance coverage amount is important because of the fact that this amount takes into consideration your needs, wants, as well as the prices of your premiums. The life insurance coverage amount is important because you need to determine the right amount of life insurance to take care of your family and your assets if you pass away.

How much life insurance coverage do I need? 

To figure out what is a good life insurance coverage amount, you will have to look into your own financial situation, and you will have to determine what amount is right for you. This coverage amount must be enough to cover all the expenses that your family might face in the case of your death. People who do not have too much outstanding debts such as a large mortgage, or those who have older children who are not financially dependent, can purchase a smaller life insurance coverage amount such as $100-400K. But those who have a large mortgage which they still are working towards paying off, and if they have financially dependent children or family members then they might need a larger amount of life insurance coverage such as anything over $500K. The amount of life insurance coverage really depends on what your personal needs are thus it really can depend from case to case, luckily life insurance brokers have multiple ways to calculate the right amount of life insurance coverage for your needs which is based on your financial situation and circumstance. In the following sections we will be discussing how to find out how much life insurance you need and things to consider when deciding “how much life insurance do I need?” 

Things to consider when purchasing life insurance

Income: Your income is a major thing to consider when purchasing life insurance. Consider how much income you currently make and what your family’s financial situation would be without your income. 

Mortgage: How much of your mortgage have you already paid off, and how much do you have remaining? This is a major question, as mortgaging a home is the most expensive purchase you will ever make. This being said, you want to make sure that your life insurance coverage amount takes into consideration how much you have remaining on your mortgage. The best question to ask yourself is: “Could my family pay off the mortgage if I passed away?”

Post-secondary education: If you have children, a major consideration when purchasing life insurance is finding out how much money will your children need to pay for college or university in the case of your death. Post-secondary education is expensive and when most people enter post-secondary education, they are a young adult who isn’t prepared to take on the entire financial burden of college/university. This being said, it is important for you to consider how much your child will need in order to pursue a post-secondary education even in the case of your death. 

Dependants: Consider the amount of people who are your dependants, of course if you have children who are not financially independent then they are your dependants, but also consider if you have a partner, parents, siblings, grandparents or anyone in your family who might be dependent on you. People who are dependent on you should be considered when purchasing life insurance because you want to ensure that they are protected financially in the case of your death.

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Finding out how much life insurance I need

The amount of life insurance coverage you need when purchasing life insurance in Canada will depend on your unique circumstances. To determine how much life insurance you actually need and which life insurance plan is the best for you, we strongly advise that you speak with a life insurance specialist and conduct a needs analysis. The amount of life insurance coverage you require can be estimated in a variety of ways, though.

Times Ten

This is among the simplest ways to determine how much life insurance you require. In essence, multiply your annual income by 10. As an illustration, multiply $50,000 by 10 to get $500,000 ($50,000 X 10 = $50,000). In order to ensure that your family can maintain their standard of living without facing financial instability in the event of your passing, you will need to purchase $500,000 in life insurance. You might want to include an additional $50,000 to $100,000 for each child.

The DIME Formula

The DIME formula is an easy way to find out an estimated amount of life insurance that you might need. This considers the primary bases, such as debts, income, mortgage, and education. The DIME formula is a great technique to use when answering the question: “How much life insurance do I need?” 

dime formula

Financial responsibility equation 

There is another great way to answer your question of: “How much life insurance do I need” is by doing a very simple equation which can help you find out the estimated amount of life insurance you need. It is simple: Financial responsibilities you want to cover (subtracted by) the current assets that you have (equals) the amount of life insurance that you will need 

The dime formula, how to find out how much life insurance coverage I need

What is the cost for a life insurance policy?

When thinking about the prices of policies one of the main question you might ask yourself is “How Much Life Insurance Do I Need in Canada?” Depending on your specific situation, the cost of your life insurance will vary. Obviously, if you have a higher rating, your monthly premium will be higher. However, if you have a standard or preferred rating, you’re in luck. The type of life insurance you want to purchase is another factor to take into account when calculating the cost of coverage. Term life insurance is currently the least expensive type of life insurance policy on the market; it is also capable of providing significant levels of coverage. Even though permanent life insurance is still very common and reasonably priced, not everyone may need it.

How much for a 10 year term?

Let’s take a look at the various prices for a term life insurance policy for a 40 year old male who is seeking a 10 year term, we will showcase the various coverage amounts depending on how much life insurance coverage you want. If you don’t see the chart for the coverage amount you want, click here to find our full article on all the prices for a 10 year term amount! 

$250,000 Coverage

Monthly rates for a 10-year term life insurance for a 40-year old seeking $250,000 in coverage for male/female smokers/non-smokers from different companies.

$500,000 Coverage

Monthly rates for a 10-year term life insurance for a 40-year old seeking $500,000 in coverage for male/female smokers/non-smokers from different companies.

$750,000 Coverage

Monthly rates for a 10-year term life insurance for a 40-year old seeking $750,000 in coverage for male/female smokers/non-smokers from different companies.

How much for a 20 year term?

Let’s take a look at the various prices for a term life insurance policy for a 40 year old male who is seeking a 20 year term, we will showcase the various prices depending on how much life insurance coverage you want. If you don’t see the chart for the coverage amount you want, click here to find our full article on all the prices for a 20 year term amount! 

$250,000 Coverage

Monthly rates for a 20-year term life insurance for a 40-year old seeking $250,000 in coverage for male/female smokers/non-smokers from different companies.

$500,000 Coverage

Monthly rates for a 20-year term life insurance for a 40-year old seeking $500,000 in coverage for male/female smokers/non-smokers from different companies.

$750,000 Coverage

Monthly rates for a 20-year term life insurance for a 40-year old seeking $750,000 in coverage for male/female smokers/non-smokers from different companies.

What are life insurance premiums

The amount you pay to your life insurance provider in exchange for the protection provided by your policy is known as a life insurance premium. Your premium is typically paid monthly or yearly. 

Things that affect your life insurance premiums:

There are a number of things that are considered for by life insurance companies when anyone applies to get life insurance coverage. 

To start with the basics, these are the general considerations that will affect your life insurance coverage if you chose to go with a fully underwritten life insurance policy:

  •  Weight
  •  Age
  •  Gender
  •  Smoking status
  • Personal health history

There are a number of factors that also come into play such as:

  •  your occupational hazards
  •  your traveling habits
  •  any hazardous hobbies that you take part in, and more. 

What are life insurance ratings 

As part of the application process for life insurance, you will have to go through an underwriting process that will result in you getting a rating. There are three ratings standard, substandard, and preferred. Underwriting is the process an insurer uses to rate you and determine your individual risk factor. Every major life insurance company in Canada has its own underwriting guide, which essentially outlines the evaluation process for applicants.

The underwriting process usually includes a medical exam that looks at the applicant’s medical history as well as the medical history of the applicant’s immediate family. Depending on the amount of insurance, age, and initial investigations, underwriters may ask for a more thorough examination.

Even though the majority of medical exams are simple, it is possible that certain tests, such as blood and urine tests, an attending physician’s statement (APS), and other questionnaires, will need to be completed.

The applicant may receive a rating from the insurer, which has an impact on the policy premiums. The applicant is given a high risk level if the insurer finds that they are in poor health. But there is a fairly wide range that is regarded as normal. The applicant might be given a preferred (lower) rate if their health is better than average. Your eligibility for different insurance plans and the cost of your premiums are affected by these ratings.

How to save on life insurance

When you think “how much life insurance do I need in Canada?” just know that there are luckily ways to save on life insurance. With the cost of living projected to get higher and higher in Canada, it is best to save your money any way you can. Life insurance is a great way to protect yourself, but costs money and requires you to pay monthly or annually. These payments obviously add up and must be entered into your budget. Luckily, there are numerous ways to save on your life insurance policy, in fact you can get a life insurance policy that roughly costs the same as a cup of coffee a day! Here are a couple of things we recommend trying if you are looking to save money on your life insurance policy. 

Get term life insurance

As stated earlier, when buying life insurance in Canada, term life insurance is on average much cheaper than permanent life insurance, simplified insurance and guaranteed issue insurance. There are awesome term life insurance products in plenty of different Canadian life insurance companies and all of these have really competitive and affordable premiums if you have a standard or preferred rating. Check out our list of the best insurance companies in Canada!

Buy life insurance when you’re younger 

The younger you are, the better your rating is, thus the cheaper your premiums will be. Age plays a major role in the underwriting process when applying for life insurance. This being said, if you get life insurance coverage at a younger age you will be paying a dramatically lower rate than if you look for life insurance at an older age.

Pay for your premiums annually 

Paying your premiums month to month might be easy, but some insurance companies offer great deals to those who pay annually. Some life insurance companies offer discounts as large as 10% off if you opt to pay annually instead of month to month. 

Work with a life insurance broker

When buying life insurance in Canada, you should really think about working with a life insurance broker! At Protect Your Wealth we offer a completely free life insurance brokerage service. We have free consultations and you don’t pay us at all in the entire process of purchasing insurance. We make getting life insurance an easy process and we are experts in the field. We can showcase the multiple different rates offered by multiple different life insurance companies and then narrow down what is right for you. Purchasing life insurance is a massive decision, make sure that you are working with a professional.

Frequently Asked Questions (FAQs) about life insurance coverage

Term life or permanent life insurance policies do not cover disability by default. You can add disability riders to many insurance policies to cover circumstances where you are injured or ill and no longer able to earn an income. 

You should look to have enough coverage to meet your living expenses, which include food, hydro, rent, transportation, taxes, and your rent/mortgage. For some people, this means at least 60% of your regular pre-tax income, but for those who don’t have children or who have paid off their mortgage may only need 40% to 50%. 

Term life insurance is a type of life insurance that pays out to your beneficiaries if you die during the term of your policy. You can specify how long your term policy will last. Insurance companies provide term life insurance for Canadians and those legally residing in Canada for 10, 15, 20, 25 or 30 years. Once the term expires, you will be able to renew your policy but there will be an increase in the premiums you pay. For example, if you purchase a 10-year term life insurance policy and you die during those ten years, the people you name as your beneficiaries will receive a tax-free payment (also called a death benefit).

Permanent life insurance is also known as whole life insurance because it covers you for the rest of your life. It also provides your beneficiaries with a tax-free payment after your death. Some plans have the ability to accumulate cash value over time. Permanent insurance costs are typically guaranteed not to rise from the time the policy is purchased. Furthermore, some permanent insurance plans allow you to pay for a limited period of time and then never again. Other types of permanent life insurance to consider include universal life and participating life.

These plans don’t ask any questions and don’t require any medical exams. Guaranteed issue insurance is intended for people with serious health problems or who are older and do not qualify for underwritten or simplified insurance. Many insurers will also offer a 24-month deferral period for guaranteed life acceptance insurance. Because it is also a type of permanent life insurance, guaranteed issue insurance coverage generally has a maximum of $50,000, with some insurers covering less, and has the highest premium of the three.

Simplified life insurance is offered in permanent life and term life insurance forms. Medical exam is not required for simplified issue insurance policies, but you must answer certain health-related questions as part of your application. In return for no medical exam, premiums tend to be higher than traditional insurance. The number of questions asked varies by insurer and also by whether or not the policy is deferred. Simplified issue insurance is typically used for term life insurance products and is an option for those who want faster approval or do not want to take a medical exam. There are less coverage amounts and there are also higher monthly premiums with simplified plans.

There are a handful of things to consider when you purchase life insurance:

  • Life insurance term
  • Life insurance benefits, or additional riders
  • Health conditions which are pre-existing or you are susceptible to based on family medical history
  • Smoking status (smoker or non-smoker)
  • Your age
  • Children’s or dependent’s age
  • Spouse’s age
  • Occupation risks
  • Existing loans and mortgages

Find a solution for what you’re looking for

When you ask yourself: “How Much Life Insurance Do I Need in Canada” just know that Protect Your Wealth will help you identify and secure the right life insurance coverage you need to create financial stability and protect your family and assets

To schedule a consultation about your income protection goals, or if you have any questions about life insurance in Alberta, B.C., or Ontario, please contact Protect Your Wealth or call us at 1-877-654-6119 to talk to an advisor today! We’re proudly based out of Hamilton, and service clients anywhere in Alberta, B.C., or Ontario, including areas such as Edmonton, Guelph, Mississauga, and Kelowna.

Talk to one of our experienced advisors today.

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