How Much Life Insurance Canadians Actually Need
This is a need analysis. It is not a product tour. Term versus permanent, cash value, and corporate ownership are separate decisions: term versus whole life and corporate-owned life insurance. If you buy a number before you have written the gap, you are shopping a multiple of salary that a spreadsheet never had to live with.
Human capital asks what future earnings are worth, then reminds you that the household does not lose every dollar of that earnings stream. DIME is a checklist — debts, income, mortgage, education — so you do not forget a category. Expense replacement is the one you buy: the annual spending that must continue, for a defined number of years, turned into capital. Use the first two so the third is complete. Do not add them together.
What the survivor actually loses
Gross salary is a ceiling, not a target. The earner consumed part of it. Tax already took part of it. The survivor may have their own earnings, a paid-off house later, and a CPP survivor's pension that replaces only a fraction of the contributor's retirement pension and shrinks if the survivor is already collecting CPP. The CPP death benefit has long been a small lump sum, capped at $2,500. Confirm the current cap with Service Canada, then leave it out of any serious capital calculation. It is a funeral contribution, not a plan.
A stay-at-home parent has human capital too. Childcare, the coordination of a household, and the option for the surviving earner to keep working are an economic loss even when the T4 is zero. Insure the adult whose absence breaks the household, which is often both adults. A large policy on a child is the wrong way around: the financial shock of a seriously ill child is usually a parent's lost wages. That is disability insurance, an emergency fund, and the critical illness decision, not a savings plan with a toddler as the life insured.
| Method | What it is for | Where people inflate it |
|---|---|---|
| Human capital | A ceiling: the present value of after-tax earnings the household was counting on. | Insuring gross pay, and ignoring the earner's own consumption and the survivor's income. |
| DIME | A checklist. Debts, income replacement, mortgage, education. Walk it so nothing is forgotten. | Adding the mortgage balance on top of an income need that already includes the mortgage payment. |
| Expense replacement | The buy number. Annual gap, for a set number of years, discounted. Then subtract assets you will actually spend. | Using a 10 or 15 times salary slogan and calling it a discount rate. |
Offsets you subtract, and offsets you do not trust
- The survivor's earnings, but only the earnings you have pressure-tested. A spouse who has been out of the workforce for a decade does not "just go back" at their old salary in month two. If the plan requires that, write the ramp in years, not as a wish.
- Financial assets earmarked for this gap. A TFSA the survivor can spend is a real offset. An RRSP is pre-tax: subtract an after-tax estimate, and only if you are willing to spend it instead of leaving it for the survivor's own retirement. Raiding the retirement plan to shrink the insurance number is a choice. The retirement income guide is what you are spending.
- RESPs belong to education. Do not subtract them from the income gap, and do not add a full tuition fund if the RESP is already on track.
- Individual life insurance you already own and intend to keep. Read the expiry date. A 10-year term that ends while the youngest child is 12 is not an 18-year asset.
- Group life at work, often one or two times salary, is real only while you are employed and while the plan still says so. It is not portable. Conversion to an individual policy, when it exists, is a short window and usually an expensive permanent product. Count group life as a bridge, or count it as zero in the long need. Do not build the family's 18-year number on a benefit that ends on resignation day.
- Lender mortgage insurance pays the lender, the balance declines, the premium often does not, and underwriting is frequently at claim time. It is not a substitute for a personally owned policy with your spouse as beneficiary. If your personal need analysis already covers the mortgage, the lender's certificate is a second copy. The stacking rule is in shopping without over-insuring.
Either leave the mortgage payment inside the annual spending need, or add the outstanding balance and remove that payment from the annual need. Doing both insures the same debt twice. Doing neither leaves the survivor with a payment and no capital. Pick one design and write it down.
A worked household, with the double count removed
One earner makes $150,000. The household lifestyle that must continue is $90,000 a year in today's dollars, and that figure includes an illustrative $24,000 mortgage payment. The survivor can realistically contribute $40,000 a year from their own work after a return you have actually discussed. You book an $8,000 CPP survivor placeholder only after checking the current formula; if you have not checked, use zero. This illustration uses $8,000 and labels it a placeholder, not a Service Canada printout.
Design chosen: pay off an illustrative $450,000 mortgage at death, so the ongoing lifestyle need falls from $90,000 to $66,000. Gap = $66,000 − $40,000 − $8,000 = $18,000 a year for 18 years, until the younger child is independent. At an illustrative 3.5 percent real discount, an 18-year annuity factor is about 13.2. Capital for the income gap is about $18,000 × 13.2 = $238,000. Add the mortgage of $450,000, other debts of $15,000, and an education top-up of $30,000 because the RESP is short. Subtotal about $733,000.
Subtract a TFSA of $80,000 you are willing to spend. Leave an illustrative $200,000 RRSP alone, because the survivor needs it for their own retirement; if you instead spent an after-tax slice of about $140,000, the insurance number would fall by that amount and the retirement plan would be thinner. Group life of one times salary is not subtracted. It ends with the job. Result in this illustration: about $650,000 of personally owned coverage on the higher earner, before you round to a face amount a carrier actually issues.
The naive version — $150,000 times 10, plus the mortgage, plus tuition — is a different number and a worse one. Human-capital ceiling, the present value of after-tax earnings over those 18 years, is higher still and is not the buy number. The buy number is the gap.
On the stay-at-home parent, an illustrative $28,000 a year of childcare for 8 years is roughly $190,000 of capital at the same 3.5 percent. That is a second, shorter policy. It is not folded into the earner's face amount, and it is not optional if the earner cannot both work and cover care.
The mortgage may be gone in 12 years and the youngest child independent in 18. Two terms, or a larger policy that drops partway, beat one 30-year term bought because the drop-down menu offered it. Permanent insurance is for a need that does not end. That test is the term versus whole life guide.
Beneficiary, will, and the number you revisit
Name a beneficiary. A policy with a named beneficiary generally bypasses the will, which is useful, and it does not replace the will. Intestacy rules are provincial, common-law partners are not treated the same way in every province, and a divorce does not reliably clean up an old designation. The legal layer is the wills and powers of attorney guide. Life events that should trigger a fresh need analysis — marriage, a child, a mortgage, a separation, a job that drops the group plan — are the same events in the life events tax piece. Insurance and tax are different forms. The trigger is the same Tuesday.
Re-run the arithmetic when the mortgage balance, the lifestyle, or the survivor's earnings change. Do not re-run it because a carrier advertised a new rider. Riders are the last step, and most of them are optional. The order is stack government and employer coverage first.
Key takeaways
- Insure the expense gap, not a multiple of gross salary. Human capital is the ceiling. DIME is the checklist. Expense replacement is the face amount.
- Add the mortgage balance or the mortgage payment, not both.
- Subtract only assets you will actually spend, and haircut RRSPs for tax and for the survivor's retirement.
- Do not lean on group life or lender mortgage insurance for a need that outlives the job or that should pay your family rather than the bank.
- Insure both adults when either absence breaks the household, including a parent with no salary and a real childcare bill.
- The CPP death benefit is a small capped lump sum. Confirm it, then ignore it in the capital calculation.
Related reading
- Term versus whole life — which needs expire, and which ones do not.
- Disability insurance — the living claim that life insurance does not pay.
- Wills and powers of attorney — the documents a beneficiary designation does not replace.
- Shopping without over-insuring — where group life fits in the stack.
The face amount is a household number. The tax on the accounts you subtracted is a different file.
RRSPs, TFSAs, and what the survivor actually keeps are tax. The 2026 tax guide is the personal side of that arithmetic.
Get the 2026 Tax Guide — $49 CAD
