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5 Simple Steps That Will Tell You How Much You Need To Budget For Insurance

how to budget for insurance

Jeff Cuellar

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While it’s possible to read up on insurance and make educated decisions based on your research, it’s highly recommended that you meet with a financial planner so that you can establish exactly how much insurance you will need AND how much insurance you can afford.

But to do that, your financial planner will need to evaluate your financial situation, create a cashflow analysis and determine exactly how much of a budget you have available for insurance.

In situations where the available budget might be a bit low, a financial planner can offer suggestions on how to cut your expenses gradually so you can free up the income needed to protect your wealth now and well into the future.

 

Income & Budget vs. Insurance Expenditure – Prioritising What’s Important

A big question most Singaporeans have about insurance is this – how much insurance should I have?

To answer this question you need to look at your budget first. Because without factoring your income and expenses to find out how much you can save each month you won’t know what insurance options are available to you (or what expenses you need to cut to make sure you’ve got enough coverage).

Let’s look at how a financial planner would review your situation:

Step #1 Determine Your Priorities

Your financial planner will want to know your financial goals such as retirement, saving for a house, etc.

If you’re saving up to buy a 55’ HD TV, a 2014 BMW 316i and a down payment for a new home, your financial advisor will probably tell you that your home purchase is the financial goal you should prioritise.

For example:

If your financial goal is to save up $50,000 for the down payment to purchase a home and you currently have $10,000 saved up – your financial planner will work with you to come up with a financial plan that’ll help you come up with the other $40,000.

Step #2 Determine Your Current Financial Position

From your answers, your financial planner will review your existing insurance policies and assets to identify any existing “gaps” in your financial plan.

For example:

A father of two only has $50,000 in insurance coverage, which is grossly insufficient if he were to pass away.

Assuming that the father’s average household spending is $1,500 a month, this $50,000 death benefit would only last his family for 33 months!

That’s why your financial planner will help you identify such financial gaps so you can make budget adjustments that free up the cash to fix them.

Step #3 Analyse and Identify Areas for Improvement

From your financial goal(s), your financial planner will help determine different ways for you to reach your goals within your given timeframe.

Your financial planner will help you do a “cashflow analysis” to break down your expenses to look for areas that you can cut down on so you can free up more cash for insurance.

For example:

Income $5,000 a month
Mortgage $1,000 Household Expenses $1,000
Car Loan $600 Insurance $300
Bills $500 Entertainment $500
Total Expenses $3,900
Monthly Savings $100

*Note: This is a very simple cashflow analysis for illustration purposes. The more detailed the cashflow analysis, the clearer financial picture your financial planner (and you) will have.

Assume the cashflow analysis chart above is yours. If your savings is only $100 a month but you need to save up at least $500 a month to reach your financial goals, your financial planner will recommend that you make cuts in certain areas – such as household or entertainment expenses by $100 each.

Why only $200 instead of $400? Because it’s a gradual process – plus you probably won’t like the idea of having to make such drastic cuts too soon).

So now, your financial planner has a $200 budget to work with after you’ve cut your expenses.

Step #4 Receive a Customised Solution to Suit Your Goals

Your financial planner will then present a few different options based on the proposed flexible budget of $150 to $200 (the amount you agreed to cut from your daily expenses).

Usually, a financial planner will try not to use the full amount ($200 in this case) because it will take time for you to get used to the cuts.

With these proposed budget cuts, you can at least start working towards your financial goals and at the same time have a more positive cashflow each month. Many financial planners will recommend making the cuts first so you can get used to them before taking up a new financial plan (which can include more insurance).

Just remember that following through a financial programme is a long-term commitment. Only start when you’re ready.

For example, let’s say you purchase a savings plan and you’re making payments without a problem for a year. But on your second year you get retrenched and have to take up a lower paying job, so you have to let the policy lapse because you can’t afford it anymore – meaning you just wasted a full year of premium payments.

So start ONLY when you’re ready, and DO NOT over commit!

Step #5 Revisit Your Goals

Regardless of your financial situation, you should revisit your goals to check up on your financial progress. That way, you can see if you can allocate more of your budget towards reaching your goals.

Also, some of your financial priorities might change so you’ll need to re-plan once again. For example, maybe you just welcomed a new child to your family – that might mean you’ll need to shift your priorities from savings to protection though insurance.

 

Evaluate Your Financial Plan Regularly

Evaluating your insurance needs isn’t just a one-time process. You’ll need to repeat this process every three years at least.

Why?

Because chances are good that you’ll experience many life changes during that time frame such as earning a higher salary, working in a high-risk environment, buying a home, getting married/divorced or having children.

In fact, if any of those major life events happen, you should amend your insurance policies accordingly so that if something does happen, you won’t have to worry about being underinsured (or worse, have your death benefit pass to your ex-wife who you forgot to remove as an insurance policy beneficiary).

Why do you think Insurance is so important? Share your thoughts with us on Facebook! For even more useful information on everything personal finance, visit MoneySmart today!

 

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Jeff Cuellar

I'm known by many titles: copywriter, published author, literary connoisseur, ex- U.S. Army intelligence analyst, and Champion of Capua.