How Much Should You Pay for Insurance?

Insurance is a necessary evil. I think that for a lot of us, we don’t like paying insurance because this is something that we’re paying a premium for something that we never know if it’s actually going to happen.

Let’s look at it in reverse. Let’s assume that for argument’s sake, we are putting money into an investment and it’s costing us $500/month. Our perspective on putting that money away is going to be very different than paying a $500/month for insurance because although we’re saving towards our plan, I, typically when we’re investing, when we’re putting money towards something that’s for our plan B that just in case we tend to look at it in the same light. So, what we need to understand and what’s more important is not how much you’re paying for insurance, it’s more so how much insurance you need in order to protect your way of life and the way of life for your family.

So, we take our clients to what we refer to as the needs and wants analysis. This is a conversation where we ask a series of questions, pretty tough questions that most people don’t like to think about everyday that allows them to think about how they would like to deal with particular situations. This is around the situation of death, total disability, suffering a critical illness like cancer or a heart attack, or being unable to work for a period of time due to an injury or illness.

So once we go through those scenarios, we understand at what do we want to see happen and we typically look at 3 things:

  1. What is our capacity to self-insure so we do have the ability to if we lost the wage in the household, our budget allows us to just live on one income comfortably;
  2. What is their ability to self-insure through passive income through investments or being able to even sell them or continue to drive an investment; or
  3. What’s your ability to outsource that risk?

For example, there’s a client who’s paying a lot of money in premiums but they’ve got a lot at stake. If they didn’t have insurance and God forbid there’s something was to happen, it would be extremely detrimental to the client’s financial situation and their lifestyle.

So it’s more important to look at insurance once again as a vehicle and find the right amount insurance that you need to protect to the bare minimum that you need. And of course just pay as much as you need to, to protect that.

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