How Much Should You Spend on Insurance Each Month?

Detailed Explanation

You've surely experienced it: when it's raining and windy, it's hard to walk alone under an umbrella, right? Insurance is just the same — you know insurance is important, but how much premium can you afford to pay each month? 😕 And then a whole crowd is saying you need a million in cover, that savings insurance forces you to save, and then something about pre-MLTA, until you're all flustered and anxious! So what should you do? The first thing you actually need to do is confirm your budget and live within your means! The money is hard-earned by you — don't be talked into things by an agent!

As a financial planner, I've seen far too many cases of people overreaching. It's like you in the rain holding too big an umbrella, greatly slowing you down! It's not your fault — no one taught you financial planning, so it's easy to fall into traps! The painful part is that the premium is due every year, on and on 🥴. The butterfly effect of not budgeting properly can have a big impact on your future 🦋. Remember: insurance is important, but it is not all of life! Look how many people, because of overly heavy premiums, hurt their cash flow and are even forced to lapse their policies — that's not worth it! ☹️

How do you set an insurance budget?

Here I'll share the starting framework I personally use often: you can first put your premium budget at 8%–15% of your total income, as a handy reference value — not a rule set by BNM, LIAM or any regulator, and not a one-size-fits-all correct ratio. The amount that actually suits you still depends on your affordability, number of dependants, existing coverage, company benefits, debts and real protection needs. The rest goes to investment and other spending. Special situations have room to adjust too — the framework is only a starting point, so apply it wisely!

Example

Here's an example of how to use this framework (not a standard answer): suppose you've just graduated and started working, earning 3k a month; using the 8% starting framework, the budget is roughly RM240, so you can first look for premiums totalling no more than RM240 a month. Some might say, how is RM240 enough? Or if the salary is RM1,800, RM144 really isn't enough to buy anything? True — everyone's affordability, dependants and protection needs differ, and this is only a starting demonstration, which is why another very important thing is 🌟getting the order right🌟.

What do we mean by getting the order right?

There are mainly 4️⃣ types of insurance you should buy: life, critical illness, medical and accident! But did you know? The order of the insurance types matters too! Generally, the order should be: medical > accident > critical illness > life. Of course this order also depends on your situation — single, with a spouse, with children, with debts, and so on, all affect the order!

In other words, if the budget isn't enough, then follow the order! First get some, then get better! — rather than doing it all at once! Understand that the more premium you pay, the more the agent usually earns — according to Bank Negara Malaysia's (BNM) guideline on the management of operating costs for life insurance and family takaful business, the commission structure is highest in the first few years of a policy (commonly within the first 6 years in the industry) and renewal commissions drop noticeably afterwards, with the actual ratio varying by insurer and product. If you can't afford it, there's no need for them to keep servicing you! 🤐

Does who you insure also have an order?

Who you insure also has an order: the earner > the money-manager > the spender > the newcomer. Many people unintentionally reverse the order — for example, once grown and earning a salary, they haven't bought their own insurance yet but want to buy for their parents; or parents, doting on their children, buy for them before they've covered themselves enough. None of this is wrong — parental love is human nature — but rationally 🌟 the order must be right 🌟. As the family's pillar, your position must come first; the pillar cannot fall, and the source of income cannot stop! 💰 Once the pillar's insurance is properly planned, then it's the turn of children and elders.

Summary

In short, don't be easily egged on into an impulsive decision! Before buying insurance, you must budget properly and follow the order 👍. Love in the right way — that is true insurance planning 💪. You hire me not because you can't plan yourself, but because an outsider sees more clearly and can help you make a rational analysis!