There is no universal answer, but a few rules of thumb can give you a starting point.
The 7 to 10 times annual income rule
A commonly used rule: multiply your gross annual income by 7 to 10.
Example: If you earn $70,000 per year, coverage between $490,000 and $700,000 is a reasonable starting point.
This rule is simple but imperfect. It does not account for your particular situation.
Factors that increase your coverage need
- Young children: The younger they are, the longer the period of dependency.
- Mortgage or significant debts: The remaining balance on your loan is often the first need to cover.
- Spouse with no or low income: Your coverage must compensate for what you contribute.
- Self-employed: No employer coverage, so the need is often greater.
- Business owner: Protection for partners, business debts, business continuity.
Factors that reduce your need
- Significant savings: A sufficient reserve reduces the amount to insure.
- Spouse’s income: If your spouse can maintain the standard of living without you, the need is less.
- Adult and independent children: Fewer dependents means less coverage needed.
- Low debts: Fewer obligations to cover.
More precise approach: add up the needs
- Income to replace: How many years of income will your loved ones need? Multiply your annual income by the number of years.
- Debts to repay: Mortgage, car loans, credit card debt.
- Children’s education costs: If you wish to cover their future education.
- Final expenses: Funeral, estate costs (often $15,000 to $25,000).
- Less: Existing savings, RRSP, other liquidable assets.
A concrete example
Situation: 38-year-old parent, $80,000 income, two children aged 5 and 8, $250,000 mortgage.
Estimate:
- 10 years of replacement income: $800,000
- Mortgage: $250,000
- Final expenses and miscellaneous: $25,000
- Current savings: −$75,000
- Approximate total: $1,000,000
This may seem like a lot. Term life insurance is priced mainly on age, health and smoking status, and raising the amount insured moves the premium less than most people expect. Buying young and healthy is what makes the difference. An advisor can confirm what that coverage costs for you.
Next step
These calculations provide an estimate. An advisor can refine the analysis based on your complete situation and present the available options.
Call us for guidance: (514) 500-7220.