Do you need life insurance? If anyone is relying on you financially, you need life insurance. The day that you die, your income stops. But your dependants – whether your kids, your parents, or anyone relying on you financially – can use that money to pay the funeral expenses, mortgage, and other debts.
Your family also needs to cover ongoing expenses like groceries and utility bills.
A life insurance payout will cover those expenses and help the survivors try to live a normal life without you.
So how much life insurance do you need? According to the Canadian Life and Health Insurance Association, the average amount of life insurance per Canadian household was $417,000 in 2018. Wondering how much you should have? Well, there’s a rule of thumb known as the DIME formula. Let’s break this down.
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How much you need for life insurance in Canada
D for Debt
Any debts you have to people, credit cards, car loans, add all your debts up together. You don’t want to leave behind any obligations to your loved ones to deal with, so it’s the first item to clear with an insurance payout.
I is for income
If your salary goes away, How much money would your family need coming in every month to afford their current lifestyle? If you die, it’s nice to give them the mental space to take the time and make smart decisions, not under financial duress.
M is for Mortgage
Whatever is left on your mortgage, if you can clear it off in one lump sum, awesome. Without a mortgage payment to worry about, your family may not need as much replacement income. The financial freedom and flexibility that comes without having a mortgage is a massive boost to the bottom line.
E is for Education
Think of your kids. Do you want them to attend university? Will it be in Canada or abroad? How much money do they need to go to university without worrying about money to focus on learning? What an incredible feeling If you can give them the freedom to go to their dream school without questioning its affordability.
Add up your debts, income replacement, total mortgage, and what you want to leave your kids for education, and that’s how much you need. But, it’s only a rule of thumb. If your house is a million dollars on its own, maybe you only cover a portion of it. The higher the payout, the higher your monthly premiums.
What type of life insurance do you need?
There are a few types to suit different situations, but the big two are term life and whole life. Term covers you for a specific period from 5 years to 30 years. Whole life covers you, well, you guessed it for your whole life.
As you approach retirement, the goal is to not have a mortgage, your kids are university graduates, and you have no debts. Hopefully, you’ve put money away in your RRSPs, TFSAs, and the stock market. So, If you die at 65, your family’s surviving members aren’t left with a massive financial burden because your savings and investments are there to help cover any remaining expenses. Arguably, at 65, you don’t need life insurance anymore. At 65, life insurance is also much more expensive. It’s much cheaper when you’re younger.
A 30-year term life insurance policy at age 35 for an otherwise healthy person will be about $30-$40 a month. It’s a small price to pay to protect your family from financial hardship and give them the freedom to move on.
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The bottom line
Do I need life insurance in Canada? Should I buy life insurance? When you get married, buy a house, have kids – they’re all critical times to think about purchasing life insurance. Remember, it’s cheaper the younger you start. Unless you’re incredibly wealthy and have no debts or mortgage payments, it’s a smart investment.