A survey by Statistics South Africa shows that South Africans spend 8.9 percent of their monthly expenditure on insurance. However, there are still people who overspend on their insurance.
According to David Dedman, founder of Lexington Wealth Management, you should never spend more on insurance than you can afford. “This stuff can be expensive,” he says. “You could really overspend when it comes to insurance. I’ve seen some clients spending over one third of their income in this area. It’s a budget buster.”
According to Dedman you only need six types of insurance: liability, health, auto, homeowners, life and long-term care insurance. “Determine the right amount of insurance through a goal-based financial plan,” he advises. “That way you know exactly what you need, and then you can buy what you can afford. And make sure you shop carefully. Find a good wealth advisor or property casualty agent that can show and compare multiple policies. Your wealth will thank you.”
Dedman says people need to a good financial plan as poor planning could be detrimental. “Poor planning in just one of these areas could be detrimental to your long-term wealth,” he warns. “It will only take one catastrophe to put you in a world of financial hurt. However, the natural tendency is to try to skimp or even self-insure with various types of risk.”
So, how much is the right amount to spend on your insurances? Dedman says it depends on the individual and their goals. “Once you’ve accumulated a large amount of investments, then traditional term insurance may no longer be necessary, or it can be reduced significantly,” he explains. “The only way to know is to create your financial plan.”
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Until next time,
The MoneyShop.co.za Team