A man about to walk into an open manhole is saying 'Pfft, Insurance, who needs that?'. While walking away from an insurance agent

How Much Personal Insurance Do You Need?

A man about to walk into an open manhole is saying 'Pfft, Insurance, who needs that?'. While walking away from an insurance agent

(personal insurance – 5 minute read)

Ah, Insurance.

My dad told me that back in the 80s and 90s that insurance salespeople were looked down upon. Insurance was this scummy industry seeking to sell something that you hope you’d never have to use.

Fast forward a few decades later and we’ve got all sorts of insurance premiums that everyone pays regularly.

As the saying goes: You’re not quite an adult until you start worrying about insurance.

But with all sorts of different types of insurances available, how do we know what we need?

In this article we’re going to talk about what sort of insurances you need and how you should be valuing it. Please note that this is just a general guide to get you on the right track. For more specific advice, you should be talking to your insurance agent or financial planner.

The must have insurances

In my opinion, universally, there are three must-have insurances:

Life insurance

If you’re single and have no dependents, you may not think much of this. But for those of us with spouses, children or even siblings that depend on us – life insurance is important.

How much you pay for life insurance depends on how much you are insured for. The higher the value of the insurance, the more it will cost. In general, life insurance pays out a certain amount to the named beneficiary (usually your spouse/partner/children) if you meet your untimely end.

There are different flavors of life insurance around. If you have a mortgage on your own home, you may want to shop around for life insurance that will pay off the balance of your mortgage if you suddenly passed away. This will give your dependents the security of their home.

How much your life insurance cover is up to you and your spouse to work out. Have a think about what sort of funds are necessary for your dependents to live a comfortable life without your income. Then have a chat with your insurance agent about how that will look in terms of premiums.

Auto Insurance

When I learned how to drive, my dad told me: ‘Never drive a car without auto insurance’. Probably the best insurance-related advice I’ve ever got.

Auto accidents happen. They happen a lot. You can be the best driver in the world but you’ll still end up getting rear-ended by a teenager who was too busy texting to see what’s in front of them (true story). Driving without auto insurance is a very non-intelligent thing to do.

Auto insurance basically comes in two flavors: third-party and full coverage. Always get full coverage. Third party only covers the damage you do to someone else’s car/property. It generally won’t pay for damage to your own car. Do not underestimate how much it will cost to fix your car.

Full coverage allows you to drive with the peace of mind that no matter what happens to your car, you’re (mostly) covered. There are excesses that need to be paid if you caused the accident. But by the end of the day, full coverage will have you sorted.

Auto insurance is always determined by the value your car is insured for (which is almost always the buying price/market value of the car). The more expensive your car is, the more you will pay for auto insurance. As a general rule of thumb: never buy a car that you can’t afford to pay full coverage insurance for.

Remember – if you can’t afford full cover on your car, you probably can’t afford to pay for the repairs if you need to fix it. Live within your means, and you’ll find that auto insurance isn’t really that expensive for the cover it provides.

Contents Insurance

It doesn’t matter if you are renting or owning the place you live in, contents insurance is a no-brainer. Contents insurance typically covers loss or damages to your personal items in the event of a theft, fire, flood or other disaster. The more ‘bad’ scenarios you pick to cover for, the more your contents insurance premiums will be.

At the very least, you will want to cover theft – as thefts can happen, no matter how secure your house is. Fire is another good one to have as you may have faulty wiring that causes your house to burn down, or there may be an accident outside your house that causes it to catch on fire.

If you live in a flood prone or bush-fire prone area, getting natural disaster insurance to protect your contents is a good idea too. You’ll want to consider the risk of these bad events happening and talk to your insurance agent about what the best option for you is.

The ‘nice to have’ Insurances

Paying insurance can be expensive. As such you shouldn’t be signing up to all the various types of personal insurance available. That being said, here are some extra ‘nice to have’ insurances that can be useful in the event of a personal injury/sickness:

Income protection insurance

The basic premise of income protection insurance is: if you lose the ability to generate your main source of income, the insurance company will pay it off for you. For a period of time that is.

This loss of ability to work should be caused by a medical issue. Redundancy insurance is REALLY hard to find these days. Another name for income protection insurance is medical trauma insurance.

Let’s say you manage to dislocate and break your arm doing a sweet swan dive off a three-metre diving board. You work full-time as a nurse. You’re not going to work for the next 3 months while recovering. Income protection insurance will pay you out a portion of your regular earnings while you are off work. There may be a stand-down period of 4 to 6 weeks before the insurance kicks in.

Income protection is nice to have and not a must-have because:

  1. You may be eligible for income cover from the Accident Compensation Corporation (if you’re based in Aotearoa). Which pretty much does what income protection does.
  2. You may be a desk worker who, barring total paralysis, can probably still do some work while injured/sick (and get paid for it)

Private medical insurance

As the name suggests – this insurance covers private medical fees should you need to access private medical services.

In a country like Aotearoa that has a robust public health system, you may not necessarily need private medical insurance. Private medical insurance is basically a nice to have if you can afford it. If you have a particular illness or condition that requires treatment, private medical insurance can pay for your medical bills and get you faster private medical service.

Basically you’re paying good money to skip waiting in the public health line. You supposedly get better service in the private medical sector (anecdotally speaking – I’ve never used private hospitals). If you’re looking to save money on Insurance, this would be a likely candidate to save on.

But if you have the disposable income for it – I think private medical insurance is a good thing to have. You may require surgery that is urgent but you’re back logged in the public health system. With private medical insurance, you shouldn’t have to wait as long and your condition won’t deteriorate.

How much to spend on personal insurances?

It’s hard to say. Different individuals have different lifestyles. Healthier individuals pay less insurance premiums compared to less healthy people. Smoking, drinking and engaging in extreme sports all affect the price of your premiums.

As a general rule of thumb, I’d say that spend no more than 10% of your total annual income on insurance annually. This means that if you have a pre-tax income of $100,000, $10,000 a year is the max you want to spend on insurance. Ideally you want to keep the portion closer to 5 or 7 percent.

By the end of the day, you hope to never have to make an insurance claim. But if you do have to, you’ll be glad you had it!

Stay positive!

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