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How Much Life Insurance Do You Need?


You can think of life insurance as a financial safety net for those you leave behind. 

Life insurance provides whomever you choose with a one-time, tax-free payment (also known as a death benefit) when you die, as long as you continue to pay your premiums.


There are different types of life insurance. It not only protects your family, it can also be part of your financial plan, as you may be able to access money in your policy while you’re alive.


What’s the best time to buy life insurance?


There are often life events that motivate people to consider getting life insurance.


  • Marriage You’re now making financial decisions as a couple. Life insurance can help keep 1 spouse’s death from financially devastating the other. If you provide for your family, or have more debt than assets, life insurance can help keep your loved ones financially secure if something happens to you. They can use your death benefit to pay for your funeral, cover everyday living expenses, settle debts (including your mortgage) and fund future education for any children.

  • Becoming a parent Life insurance can help provide for your child and your family if something happens to you. You may also consider buying life insurance for your child.

  • Buying a home With life insurance coverage you can help make sure your family can pay off the mortgage and other expenses if the unexpected happens.

  • Starting a business When 2 or more partners start a business, having life insurance can provide funds to allow surviving partners to run the company. Business-owned insurance provides a one-time payout to your company if you, your business partner or key employees die. It can help cover business debt, overhead expenses or a partner buy-out.

That doesn’t mean you can’t or shouldn’t buy life insurance if you’re single. Being young and healthy are good reasons to get life insurance because generally you’ll pay less for your life insurance when you’re younger.


How much life insurance do you need?


The amount of insurance you need will depend on what you’re using it for – replacing your income, paying off your mortgage, funding education, etc. 

According to the Canadian Life and Health Insurance Association - Opens in a new window, the average life insurance protection per household in Canada is $442,000. 

Experts recommend purchasing at least 5 times your annual income in life insurance coverage, although every person’s situation is unique. A 2021 Canada Life General Financial Knowledge Survey determined that only 27% of Canadians knew the recommended life insurance coverage. 


An example

Trevor is in his mid-30s and makes $70,000 a year, wants to add $50,000 to his 2 children’s registered education savings plans (RESPs), pay off a $400,000 mortgage and provide $10,000 for funeral and final expenses. 

5 times annual income ($70,000)

$350,000

RESPs ($50,000 x 2 children)

$100,000

Mortgage

$400,000

Final expenses

$10,000

Total

$860,000

That means his policy should payout $860,000. And because he’s married and his partner makes the same income, they should both have policies for this amount.

An advisor can help you determine the amount of life insurance that’s right for your situation.


The above example is for illustrative purposes only. Situations will vary according to specific circumstances.


What type of life insurance you need


There are 2 basic types of life insurance coverage: term and permanent. Each has unique features designed to meet different needs.


Term insurance


Term life insurance protects you for a set period of time, like 5 or 50 years. When that time’s up, your coverage is renewed at a higher cost if you don’t cancel your coverage. You can also convert it to permanent life insurance without having to answer questions about your health.  


It often has a lower initial cost than permanent life insurance, and it’s a popular way for those starting out to protect themselves and their families. Term life insurance is usually less expensive than permanent life insurance, so you may be able to purchase more coverage.


Permanent insurance

Permanent life insurance gives you lifelong insurance coverage as long as you pay your premiums.  


The premiums you pay for your coverage, along with premiums from other participating life insurance policy owners, go into an account. The insurance company’s professional investment team manages this account, investing to increase its value. 


It’s from this account that your death benefit and any potential dividends are paid. While dividends are not guaranteed, any you may receive can be used to buy additional coverage, reduce your annual premium payments or be taken out as cash (though any cash values withdrawn from the policy may be taxed).  If you borrow or withdraw money from your policy, it will reduce the policy’s cash value and how much money the person (or people) you’ve designated will receive (called a death benefit).


Other types of insurance to consider


  • Critical illness insurance Critical illness insurance can give you a tax-free payment if you’re diagnosed with a serious condition. Your contract will define which conditions you’re covered for, but some examples include cancer, heart attack or stroke. 

  • Disability insurance Disability insurance can give you a tax-free monthly payment to help replace your income and cover your expenses if an illness or injury keeps you from working.  While a disability can often be visible to the naked eye, not all disabilities are so easily recognized. Chronic pain or a mental health issue can also qualify as a disability. 

What’s next?

Now that you understand more how much life insurance you need, you may want to contact your advisor to:

  • Determine how much life insurance to purchase

  • Determine what kind of life insurance to buy

  • Discover how life insurance fits into your financial plan

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