In Short
A common starting point is 10–15 times your annual income, but a better estimate adds up what your family would actually need — replacing income, clearing debts, funding education and final expenses — then subtracts existing coverage and savings. The result is your real coverage gap.
“How much life insurance do I need?” is one of the most important — and most over-simplified — questions in personal finance. Rules of thumb are a fine starting point, but a short calculation tailored to your situation gives a far more accurate answer.
Start With a Rule of Thumb
A widely cited guideline is 10 to 15 times your annual income. For someone earning $80,000, that suggests $800,000 to $1.2 million of coverage. This is quick and reasonable as a first pass, but it ignores your specific debts, savings, and family needs.
Then Do a Needs-Based Calculation
A more precise approach adds up what your family would actually need, then subtracts what you already have. Think of it in two parts.
What your family would need (add these up):
- Income replacement: the annual income your household relies on, multiplied by the number of years it would be needed.
- Debts: mortgage balance, loans, lines of credit, and credit card balances.
- Future goals: children’s education, and any other large planned costs.
- Final expenses: funeral costs and any estate settlement expenses.
What you already have (subtract these):
- Existing life insurance, including group coverage through work.
- Savings and investments (RRSP, TFSA, non-registered).
- Other assets your family could reasonably draw on.
The difference between the two is your coverage gap — the amount of new life insurance that would actually protect your family.
A Simple Example
Suppose a family needs $700,000 for income replacement, $350,000 to clear the mortgage, $100,000 for education, and $25,000 for final expenses — a total need of about $1,175,000. If they already have $150,000 in group coverage and $125,000 in savings, the gap is roughly $900,000.
Term or Permanent?
Once you know the amount, you can choose the structure. Term insurance is usually the most cost-effective way to cover a large, time-limited need such as raising children or paying off a mortgage. Permanent insurance suits lifelong needs and estate planning goals.
Revisit the Number Over Time
Your coverage need changes as your mortgage shrinks, children grow up, and savings grow. Review it at major life events. A licensed insurance advisor can run the calculation with you and recommend an amount and structure that fit your budget — and you may also want to weigh it alongside critical illness coverage.