Calculate How Much Insurance You Need

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When Do You Need Insurance?

You need insurance when you can not afford to recover from a potential financial loss on your own using your savings or alternate personal financial means. As your savings grow and your life changes, your need for insurance should be evaluated. 

Insurance is something you buy to protect your lifestyle or quality of living if something unforeseen happens to avoid having undue hardship. 

You pay a premium to an insurance company for whatever you want to insure, and in turn, if something goes wrong, they will take care of it for you financially.

What Insurance Do You Need? Basic Guideline

The first step in understanding what kind of insurance you really need is to understand why you buy insurance.

  • If you are buying insurance to protect something that would not really impact your life, or that you can handle yourself using savings, then you probably don't need that insurance. 
  • If you are buying insurance to protect your livelihood, your living conditions, or your family's financial stability because you would not be able maintain your quality of living due to the financial impact it would have on you if you suffered a loss , then you are probably making a good choice in buying insurance.

7 Kinds of Insurance to Budget For:

  1. Personal Property Home and Contents Insurance
  2. Liability Insurance (included with residential insurance)
  3. Additional Living Expense Insurance (included with residential insurance)
  4. Car Insurance
  5. Disability
  6. Life Insurance
  7. Health Insurance

You may not need all these kinds of insurance, but understanding how they protect you may help you decide how much you need based on your current life stage, and when you need it.

Personal Property Insurance

Personal property insurance protects your assets. Common personal property insurance relates to your home insured value, your personal contents or your car.

Personal Liability Insurance

Liability insurance may be included with residential insurance policies and it protects you from having to pay legal fees, defense or expenses related to your ownership, use of the property. or your actions worldwide. Umbrella liability insurance is an optional coverage that can help supplement your primary liability insurance policy.

When you take higher deductibles, you "self insure" more of your property, so you take less insurance with the insurance company which in turn saves you money.

How Much Personal Property Insurance Do You Need?

If you are financing your purchases, you will often be required to take out insurance on your property (like a home or car). First-time home-buyers will often need proof of insurance for their mortgage. You will want to get insurance to cover the reconstruction value of your home, and consider the benefits for all-risk coverage to allow the most comprehensive protection possible. Learn more in "What is an all-risk insurance policy".

Contents in Your Home and Other Personal Items

If you do not own a home, or if the value of the contents in your home is higher than usual, you may consider insuring your personal contents on a rider or through a renter's policy, or condo insurance.

Creating a home inventory will tell you how much insurance you need for your personal property. Read more about Replacement Value and Actual Cash Value Options which can impact how much money you get for your contents or building in a claim. 

Protecting Where You Live

Consider the impact of losing where you live for a few months due to water damage, fire, or other claims. Would you be able to pay for a place to live without insurance help? If not, then you need Additional Living Expense coverage. Additional Living Expense coverage is included in most residential insurance policies and covers the extra costs you incur when you are unable to live in your residence due to an insured loss that makes your home uninhabitable.

Car Insurance for Older Cars

Many people try and save money on car insurance by asking for the minimum insurance. The minimum insurance does not cover things like if a rock hits your windshield, you slide out of control while driving, or if the car catches fire, is vandalized or stolen. You can choose whether you want full coverage on an older car, which would include the Liability, Collision, and Comprehensive coverages. Or, if you feel the value of the car is low, but don't want to insure for minimum coverage only, then you could insure for the comprehensive coverage, which will cover repairs like windshield damage or other risks like fire.

If Your Car Is Being Repaired Due to an Accident, Do You Need a Rental Car?

Consider collision and comprehensive coverage. If you don't have the coverage, you would not get paid in a claim or get a rental car while your car is being repaired due to an accident or disaster. Learn more about comprehensive coverage here

Gap Insurance: Do You Need It?

Gap insurance is not a requirement, but it may protect you when you have a loan or lease on your car. When you've paid down your loan, you may not need this coverage.

Personal Disability Insurance

Disability insurance protects your income if you are suddenly unable to work due to an illness or accident. It is usually available as part of an employee benefits package. There are two types of disability, long term, and short-term disability coverage. If you freelance, or are self-employed, you may also consider purchasing personal disability insurance. Private unemployment insurance is also an option to consider.

How to Calculate How Much Disability Insurance You Need

Disability insurance may not seem like a priority but did you know that three in 10 people suffer a disability at some point or other that keeps them off work for 90 days. Disability insurance can help you from financial hardship when you are unexpectedly unable to work due to illness or injury. Statistics show that 90% of disabilities are due to illness and not accidents. You can calculate how much you need by adding up:

  • Cost of your mortgage or rent
  • Property taxes
  • Utilities
  • Groceries
  • Debt repayments
  • Insurance premiums
  • Health expenses
  • Home maintenance costs
  • Car loan payments or lease payments
  • If you have savings to help pay these costs

The non-profit organization, Life Happens, offers a free tool to help you calculate how much disability insurance you need.

Life Insurance

There are many cost-saving options in choosing life insurance. Knowing if you need life insurance is the first step, and you can read more about this in our article: How to Know if You Need Life Insurance

How Much Life Insurance You Need?

Studies show that 36% of Americans intend to purchase life insurance this year. Life insurance is one of the more affordable types of insurance if you purchase it early in life. Depending on what your goals are, there are life insurance companies that are better for people at different stages due to the product features of the policies offered. Choosing an affordable life insurance policy that makes sense for your situation is important. A financial advisor will be able to sit with you and calculate how much you need using a needs analysis calculation.

You should also determine what you can afford now and what your priorities will be. Here are some considerations when trying to decide how much life insurance you need:

  • Cost to pay off your debts
  • Cost to pay off the mortgage
  • Funds for children's education
  • How long you want to replace your income for your family or beneficiary?
  • Final expenses
  • Assets, including savings, retirement savings, pensions, etc.
  • Insurance from your employer life insurance policy, or other existing life insurance insurance

If you are like more than half of Americans, the loss of a primary wage earner would have a financial impact on your family's wellbeing and ability to maintain a lifestyle within a year.  When thinking about what life insurance you need, consider the above to help decide how much life insurance your family would need.

Strategy for Life Insurance: Different Amounts of Insurance at Different Life Stages

Buying life insurance needs to be part of an overall strategy. Consider that the longer you live, the more of your debts can be paid off and assets will build to offset expenses. You can choose multiple policies of different terms to create a long-term approach. Discuss options with your financial advisor.

Health Insurance

Determining a budget for health insurance depends on your personal situation. Consider the different aspects of the type of plan you are looking for.

In health insurance the question is not how much but what kind of health insurance you need. Different plans provide more or less flexibility, higher or lower deductibles, access to doctors with or without health insurance provider restrictions.

Learn more about health insurance needs by reviewing 10 aspects of health insurance costs to save money, and check out the advantages of HSA's or FSA's to help understand more about how to use health insurance choices to your advantage. 

Article Sources

  1. Insurance Information Institute. "How Much Homeowners Insurance Do I Need?" Accessed June 30, 2020.

  2. Insurance Information Institute. "Are There Different Types of Policies?" Accessed June 30, 2020.

  3. Insurance Information Institute. "How to Create a Home Inventory." Accessed June 30, 2020.

  4. NAIC. "A Shopping Tool for Homeowners Insurance." Page 8-11. Accessed June 30, 2020.

  5. Insurance Information Institute. "Understanding the Insurance Claims Payment Process." Accessed June 30, 2020.

  6. LifeHappens. "Disability: Who Needs It?" Accessed June 30, 2020.

  7. Life Happens. "Calculate Your Needs." Accessed June 30, 2020.

  8. LIMRA. "2020 Insurance Barometer Study." Accessed June 9, 2020. 

  9. LIMRA. “More than Half of American Adults Say Loss of Primary Wage Earner Would Have Financial Impact within a Year.” Accessed June 7, 2020.