How Much Life Insurance Do You Actually Need? A Framework for Canadians

Ask ten people how much life insurance they need and you will get ten different answers, most of them guesses. There is a better way, and it starts with a simple, honest look at the numbers.

The Problem: Most People Are Just Guessing

When it comes to coverage, most people fall into one of three habits. They accept whatever their employer provides, often one or two times their salary. They pick an affordable round number that feels about right. Or they accept an agent's recommendation without really understanding where it came from.

Two times your salary sounds reasonable until you do the math. For many families, that amount covers only one to two years of income and leaves the biggest obligations, like a mortgage and years of future expenses, completely unfunded.

A Simple Framework: DIME

The DIME method gives you a realistic starting point by adding up what your family would actually need to replace. It stands for Debt, Income, Mortgage, and Education.

• D is for Debt. Add up all of your non-mortgage debt: credit cards, car loans, personal loans, and lines of credit. This is money your family should not have to carry.
• I is for Income. Multiply your annual income by the number of years your family would need stability. Ten years is a common benchmark.
• M is for Mortgage. Include the full outstanding balance on your mortgage so your family can stay in their home.
• E is for Education. Estimate post-secondary costs for each child. In Canada, a conservative range is roughly $60,000 to $100,000 per child.

Add those four numbers together and you have a baseline coverage figure that reflects your real obligations rather than a generic rule of thumb.

A Few More Things to Consider

DIME is a baseline, not a final answer. A few factors will move your number up or down.

• Existing savings and investments. Assets in your RRSP, TFSA, or other accounts can reduce how much coverage you need.
• Your spouse's earning capacity. A partner's ability to earn, and how vulnerable the household would be without your income, both matter.
• Your life stage. A younger family with a large mortgage and young children generally needs more coverage than a household near the end of those obligations.
• Major life changes. Revisit your number when you buy a home, have a child, start a business, or experience another significant change.

The Type of Policy Matters Too

Knowing how much is only half the decision. The type of coverage matters just as much.

Term insurance covers you for a fixed period, commonly 10, 20, or 30 years, at a lower premium. It is well suited to obligations that will eventually resolve, like a mortgage or the years until your children are independent.

Permanent insurance lasts your whole life and builds cash value, at a higher premium. It fits needs that do not expire and long-term planning goals.

In practice, most families benefit from a combination: term coverage to handle the large, temporary obligations, and permanent coverage for lifelong needs and cash-value strategies. The right mix depends on your budget, your timeline, and your goals.

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