Bringing a child into the world means taking on financial dependency that could last decades. Life insurance can help compensate for a parent’s lost income or the value of unpaid care around the house in case of death. How much coverage you need depends on your family’s needs, not a rule-of-thumb figure based on your salary.
Our team researched this topic using the Financial Consumer Agency of Canada’s life insurance guide, FCAC’s Budget Planner, the Government of Canada’s current maternity and parental benefits guide and FSRA’s guide to reading a life insurance policy.
Is It Time to Get Life Insurance When You Are Having a Child?
Generally, yes, as long as a child or another adult would experience a shortfall in income, housing or childcare costs because of a parent’s death. Even the death of a stay-at-home parent can create a financial shortfall.
That said, depending on your assets and current life insurance coverage, the answer could be little or none. Before buying coverage, figure out the size of any potential shortfall.
Why Should New or Expecting Parents Get Life Insurance?
| Need after a parent’s death | Amount to estimate | Avoid double counting |
|---|---|---|
| Income replacement | Annual after-tax household shortfall multiplied by the years it lasts | Survivor earnings, benefits and investment income |
| Housing and debt | Mortgage or rent support, joint debts and essential transition costs | Debts that the estate can pay from other assets |
| Childcare and household work | Local cost of replacing the tasks or the survivor’s reduced work income | Services already covered by family or public programs |
| Education | The family’s intended contribution, with a time and savings assumption | RESP and other dedicated savings |
| Final and estate costs | A realistic local allowance and professional fees | Cash already reserved for the same costs |
Calculate How Much Coverage Each Parent Needs
If you have a stay-at-home parent, you should find out how much childcare and other services a surviving spouse may need, for how long, and the local rates for transportation and other help.
Then calculate the potential coverage needed:
Total income needed × number of years needed, plus debt and one-time goals, less liquid assets and existing life insurance = estimated coverage need.
Decide whether the money would be invested or spent. The numbers shown below are for illustration only and are not recommendations.
| Illustrative family need | Calculation | Amount |
|---|---|---|
| Annual household income shortfall | $45,000 for 20 years | $900,000 |
| Mortgage and other priority debt | Current balances selected for payoff | $350,000 |
| Education goal | Family’s planned contribution | $80,000 |
| Final and transition costs | Temporary help and settlement budget | $25,000 |
| Less liquid savings | Available for this purpose | -$100,000 |
| Less workplace life insurance | Amount expected to remain available | -$150,000 |
| Illustrative coverage gap | $1,355,000 minus $250,000 | $1,105,000 |
Read More: Estimate Your Family’s Life Insurance Needs
Plan for the Parental-Leave Budget
Include the cost of insurance in your budget and confirm that it remains affordable during leave and after returning to work. A smaller insurance plan you can sustain is more useful than a larger one that gets cancelled for lack of payment.
Federal EI maternity and standard parental benefits are 55% of earnings up to the applicable maximum. Extended parental benefits are 33% of earnings up to a lower maximum. Quebec has a separate system.
Do not assume that benefits are equivalent to regular earnings unless your employer has a policy to top up EI benefits. Consult the EI benefit calculator for more accurate planning.
FCAC’s Budget Planner asks about income sources, recurring expenses, new baby-related variable expenses and savings. Use it before getting insurance quotes.
Should New or Expecting Parents Get Term or Whole Life Insurance?
| Feature | Term life insurance | Whole life insurance |
|---|---|---|
| Coverage period | A stated term or age while the policy remains in force | Lifetime while required premiums are paid and contract conditions are met |
| Cash value | None | Often includes guaranteed cash value; details vary |
| Initial premium | Generally lower for the same death benefit | Generally higher because coverage is permanent and may build value |
| Renewal | May end or renew at a higher rate under the contract | Usually designed with level premiums, but confirm the schedule |
| Conversion | Only if the policy includes a conversion right and the deadline has not passed | Not applicable in the same way |
| Dividends | None | Only participating policies may pay non-guaranteed dividends |
| Typical parent use | Large temporary income, mortgage and childcare need | Permanent estate, lifelong dependency or final-cost need |
You can layer different terms. For example, a new or expecting parent might buy one amount of term insurance that expires with the mortgage and another amount that matches the youngest child’s dependency period.
However, consider the premiums and renewal dates compared with a longer term. Don’t assume that you can convert term insurance to permanent coverage. Confirm that conversion is included in the policy.
Read More: Compare Term and Whole Life Insurance
What Policy Riders Are Beneficial for Young Parents?
Child riders and insurance on the parents address different financial risks. Death benefits for children could be used to pay funeral costs or allow parents to take time off work. But they wouldn’t address the much larger costs associated with a parent’s death, such as childcare and lost income.
When considering riders, ask whether a rider addresses a gap in the plan, how it is triggered, what it pays and how much it costs. FSRA advises buyers to confirm that requested riders appear in the policy and to review eligibility criteria and exclusions. Conversion terms and maximum ages vary by insurer and policy.
| Rider or feature | What it may do | What to verify |
|---|---|---|
| Child term rider | Adds a stated amount of life insurance on eligible children | Start age, covered children, expiry, exclusions, total benefit and conversion option |
| Waiver of premium | May waive specified premiums after a qualifying disability | Disability definition, waiting period, duration, exclusions and which premiums qualify |
| Accelerated death benefit | May advance part of the parent’s death benefit after a qualifying terminal illness | Medical definition, amount, fee, tax treatment and reduction of the final benefit |
| Guaranteed insurability option | May allow more coverage at stated events without new medical evidence | Events, ages, maximum increase, price and expiry |
Read More: See How Dependent Life Insurance Works
Do Both Parents Need Life Insurance?
One parent’s death may cause a larger income loss, while the death of the other may create higher childcare and household-service costs. Evaluate each parent’s situation separately.
A Breadwinner Spouse’s Group Insurance May Not Provide Full Coverage
Don’t automatically assume that your breadwinner spouse’s group insurance provides adequate coverage. Coverage may depend on continued employment.
Ask human resources for the coverage amount, beneficiary form, exclusions, options for additional coverage, conversion rights and applicable deadlines. Recalculate your insurance needs if your spouse changes jobs, takes leave or reduces their hours.
Added Stability for Dual-Income Households
Determine how much money you’d need if one parent dies, factoring in how much of the shortfall the other parent can cover while managing child-rearing and work demands.
Also determine what would be needed if both parents died, including guardianship and trustee arrangements that would not necessarily assume their careers or lifestyles would continue.
Name Beneficiaries With the Child’s Plan in Mind
FCAC recommends considering a trust and the trustee or administrator who would manage it if your beneficiary is a minor. Do not assume that naming someone as a guardian also authorizes them to manage money belonging to the child.
Update the designation when another child is born or enters your life. Have a lawyer coordinate the will, guardian designation, trustee and beneficiary designation, as some provinces have specific rules.
Review the designation if you move provinces, separate, remarry or if a beneficiary dies. Other adults should know where your policy is and how to contact the insurance company.
Read More: Read the Guide to Contingent Life Insurance Beneficiaries