How Much is Too Much?

A lot of us have experienced meeting insurance agents trying to sell us more plans. They’ll usually tell us about some scary issue that we need to protect against. Some of them will even do a review to point out ‘gaps’ in our coverage. Have you ever wondered though, how much is too much insurance? Do you measure it by the amount of premium paid? Or should we measure it by the amount of coverage?

Today I’m going to teach you the best way to think about your insurance, so that you can make educated decisions about the policies you buy. Note though that I’ll focus on life insurance which are the types of insurance you buy on yourself (as opposed to car or home insurance).

To begin, we must first understand what insurance is. At its core, insurance is a legal contract between two parties – the insurance company and us. The contract states that in the occurrence of a bad event (aka trigger event), the insurance company will pay out some money to someone. Examples of trigger events are death, disability, illness, or hospital treatment.

Knowing this, the next step is to think of who needs to be paid if any of those trigger events occurs. I’ll say that again – who NEEDS to be paid.

For example, if considering the trigger event of death, ask yourself who needs to be paid if you are no longer around. If you have no dependents or are not expecting to have any dependents in the reasonable future, then there may not be a ‘risk’ to protect in the event of death.

As for hospitalisation aka medical coverage: While a lot of us will agree that there is a need to pay the hospital in event of treatment, claims for this type of coverage are a little different. What I mean is that the maximum amount that insurance companies will pay is always limited by the amount of your hospital bill. So if you have a high amount of coverage already, do you really need more?

Friends, at the end of the day, insurance is a cost. It is certainly a necessary cost as it gives us important tools to manage financial risks in life, but it is a cost nonetheless. As with any cost, the idea is to only incur them when needed.

My recommendation is to cover only the risks that truly need to be covered first. After that, assuming the rest of your finances like financial planning, investments, and cashflow are healthy, then go ahead and consider additional coverage (e.g. leaving behind a gift).