What Proportion Of My Monthly Earnings Should Go Into Insurance?

Most people know that insurance is an important aspect of a holistic financial plan. However, not many Singaporeans proactively address their insurance needs or get sufficiently insured.

People may consider their insurance premiums as an additional expense that they would rather minimise. This is an understandable – given a choice, most would prefer to spend as little as possible on their purchases.

Yet, insurance should be seen as not just an unavoidable expense, but a necessary one.

Think of it this way: when we are working, the biggest risk we face is having an illness or accident rob us of our ability to earn a living for ourselves and our family. These are risk areas in life that can be circumvented – through adequate insurance coverage.

Naturally, adequate insurance coverage comes as a price. Given an unlimited budget, we would all prefer to have the best and most comprehensive coverage that money can buy. However, we live in a real world where we have to adjust our needs and wants based on the budget that we have.

So, how much should you be spending each month on your insurance policies? To answer this question, here are a few factors to consider.

Instead of trying to commit a fixed percentage of your monthly salary towards your insurance expenses, you should first work out how much you can comfortably afford each month.

For example, an individual who earns a monthly salary of $5,000 but already has numerous financial commitments may actually find himself having less available money compared to someone who earns a monthly income of $3,000, but has less financial commitments.

If you fall in the first category, you should work on reducing or minimising your financial commitments first rather than trying to stretch your budget for more insurance coverage from the start.

Another consideration you shouldn’t ignore is that just because you have the ability to afford a high level of insurance coverage today, doesn’t mean you should automatically commit to it. You should also consider your ability to afford a high level of coverage years down the road. That’s because insurance policies are long-term financial commitments that can straddle several decades.

When buying an insurance policy, you should consider the long-term affordability of the plan. In fact, it will be more beneficial for you to take up a slightly lower level of coverage but be able to comfortably afford it, than to have a higher level of coverage but end up surrendering the policy prematurely because you can no longer afford the premiums.

Again, this is a question that cannot be answered simply based on how much you are earning. That’s because the level of coverage you need isn’t only tied to how much you are making, but more pertinently, the phase in life that you are in.

For example, a high-income earner who is still single, and does not have to provide for his parents, may not need as much insurance coverage compared to another individual who earns substantially lower, but is married and have young children dependent on his income. In such a situation, the family man would need more insurance coverage compared to the bachelor, even though his income is lower.

Coverage area that you need to look into would include life insurance – which provides a payout to your dependants in the event you are no longer around, critical illness insurance – which provides a payout to you in the event that you are diagnosed with a critical illness and disability income insurance – which provides you with a monthly income in the event that you are unable to work due to a disability.

Other coverage areas will also include personal accident and hospitalisation coverage.

In an ideal situation, the level of coverage that you need should be an amount that you can comfortably afford. If that’s the case for you, then great! Ensure you are adequately insured.

However, we all have to live within the constraints of a budget – usually our take-home pay. The insurance premiums for the coverage that you need today may be much higher than what you are comfortably able to afford.

If this situation arises, it doesn’t mean you should simply drop the whole insurance planning exercise, nor does it mean you should drop important financial commitments already in your life.

Rather, try to calculate an amount that you are comfortable with paying, and work out with a trusted financial advisor to receive an optimised coverage level within this budget.

While it may not be adequate to get you fully insured, it ensures, at the very least, that you cover your basic insurance needs for yourself and your loved ones. You should then work at reducing or minimising financial commitments that are less important. Any savings from this exercise could go into adequately insuring you and your loved ones.

Insurance, after all, is about lowering your risk areas in life, and not completely eliminating them, or worse increasing your risks by stretching your finances to its limits.

If you want to reduce the cost of your insurance, you can also consider joining AIA Vitality. AIA Vitality enables you to enjoy up to 15% in premium discount on your insurance premiums, as well as many other discounts and benefits when you make healthier choices in life.