How Much Of My Income Should Be Dedicated Towards My Insurance Policy

You have decided to be proactive about your financial future and are now considering which insurance plan to take up. Congratulations! 

Insurance is an essential part of a solid financial plan, as it protects you and your loved ones from a potential financial crisis caused by unexpected setbacks.   

As you look through the proposals prepared by your insurance agent, you are probably wondering how much money you should be allocating each month for your premiums. 

The general rule of thumb is to set aside 5% of your income to pay for your insurance. Having said that, everyone’s financial situation is unique, so do also follow these three steps to help you determine your budget:

1. Decide how much you can afford

Before you sign on the dotted line for any insurance policy, an important factor you should consider is long-term affordability. In other words, is the proposed premium an amount you are comfortable paying every month? 

Take stock of your monthly salary and what your financial commitments are, such as food, transportation and your credit card debt. 

Do also take your long-term goals into consideration. For example, you are probably planning to buy a car or an apartment in the near future. You may also want to start growing your wealth by investing

Finally, don’t forget to also take your recreation expenses into account (yes, this is important. Everyone needs to unwind once in a while!).  

2. Think about your financial protection needs

How much coverage you need will not only depend on how much you currently earn, but also where you are right now in your life. 

For instance, if you are single with no dependants, you won’t necessarily need a high coverage policy. But if you are married with children, and are the primary breadwinner for your family while also providing for your aging parents, then your coverage needs will be higher.

3. Seek the perfect balance between how much you can afford with your needs

Once you have worked out what you need and how much it costs, see if it fits with your budget. If it does, then great! You’re all set. 

But more often than not, the amount you need will clash with what you can actually afford. This however does not mean you should abandon your insurance plans altogether.  

Work with your insurance agent and financial advisor to draw up an alternative plan with a lower level of coverage that’s still optimised for your protection. This ensures that you at least have your basic insurance needs covered at a premium you can afford. 

In the meantime, see if you can work on reducing your financial commitments and any other unnecessary expenses. In a couple of years, perhaps you will also get a raise, which will greatly help. This is when you can most likely upgrade your coverage to a higher level. 

Evaluate your policy from time to time and make the necessary adjustments as your needs and circumstances change over the years.     

These three steps are by no means the only way to decide on the correct amount for your insurance expenses. But it is a great starting point for discussion with your insurance agent, and ensuring your policy is properly customised to truly match your needs. 

If this whole process seems overwhelming, our advisors are always available to help. You can get in touch with us here.