iMoney: What percentage of income is reasonable to spend on insurance?

Recently, there have been many cases in the insurance market that have caused customers to lose trust, such as bank employees being ambiguous when giving insurance advice, insurance employees not clearly advising on contract terms...

However, it is undeniable that participating in life insurance is a good solution to maintain financial resources against risks of accidents, illnesses, etc. However, not everyone knows how much insurance to buy and how to choose insurance.

Below is the sharing of Ms. Nguyen Thu Giang - expert of FIDT - investment consulting and asset management unit in Vietnam. Ms. Giang also has many years of experience in the insurance field.

20 years old, 30 years old, 40 years old, what kind of insurance should I buy?

In fact, insurance is a long-term product package, which can last for decades, so it is necessary to set up a strategy for allocating income to insurance products. So should the amount of money deducted for insurance be the same every year or at different stages?

- First, people need to realize that their ability to earn money is an asset, and an important asset.

The principle is that the more important the asset, the more conscious we should be about risk management for it. When we are young, most of our assets are intangible. Gradually over time, these assets will accumulate into financial assets or real estate. But for young people, it is a story of potential, a story of the future.

Participating in life insurance is a good solution to maintain financial resources against risks of accidents, illnesses, etc. (Photo: Manh Quan).

On the other hand, risk management always goes hand in hand with financial obligations, specifically for dependents, relatives who, if they no longer have a source of income from us, will become financially vulnerable in the short and long term. Long term here can be 10 years, 20 years or more. If the dependent is a child, it is from birth to 18 years old. If the dependent is an elderly person, it is from retirement to death. Insurance, as a protection for future income, is important for young and middle-aged people and is no longer important for the elderly.

However, in addition to protecting income, insurance also plays a role in limiting the cost of medical care , accident treatment, and serious illness for family members. At this point, it depends on the age and health of dependents.

If you want to set up a good enough protection net for all family members, the insurance premium will certainly be very high, so here you need to consider whether the family prioritizes increasing assets or financial protection; if there is a limit on insurance costs, you need to consider which subjects to prioritize protection benefits for, for example, prioritizing the elderly and children under 3 years old.

In your opinion, should we consider increasing or decreasing the income ratio for insurance? How should we choose insurance packages depending on age?

- In their 20s, when they have just graduated from school and have income, are not married and do not have a family, most young people do not need to equip themselves with life insurance.

However, there are some students who, right from the first days of graduation, have taken on the responsibility of supporting part of the family's living expenses; being a support and support for parents and relatives who are not financially well-off, especially parents who do not have social insurance or any other pension, then those students need to understand that they have dependents and are financially responsible. At this age, it is only necessary to buy the main life insurance product, without having to buy additional supplementary products; assuming an income of 10 million VND/month, you can still deduct 6% of your annual income to buy an insurance package with a premium of 7.2 million VND with an insurance amount of less than 1 billion VND.

By the age of 3x, when married and having children; at this time financial responsibility has increased significantly. To calculate the insurance amount for this stage, you should not ignore the most important needs such as debt repayment, essential expenses for the remaining people for at least 10 years, education costs for children until the age of 18...

First, it is necessary to prioritize the insurance amount large enough for the above needs, taking into account factors that reduce needs such as liquid assets, income of spouse, passive income... After calculating the life insurance level with the main product large enough, then base on the budget to buy additional supplementary products accordingly.

After calculating the life insurance level with the main product large enough, then base on the budget to buy additional appropriate supplementary products (Photo: IT).

During this period, income usually increases gradually and peaks around age 35, so if you buy insurance earlier, you need to estimate income growth and projected income at age 35 to come up with a reasonable budget. If income at age 35 increases by 2 times compared to age 25, you should buy an additional product equivalent to the premium purchased at age 25. If income increases by 3 times compared to age 25, you should increase the insurance amount either with a new contract or with a death benefit product. The figure of 5-8% of annual income should be used as a reference when calculating the insurance budget.

At the age of 4x, the need to protect future income begins to decrease as children begin to grow up, financial responsibility is somewhat reduced. However, the cost of medical care, accident treatment, and serious illness will increase, so this is the stage to reduce the main product and increase the supplementary product.

At the age of 5x, most people no longer have much need to protect their future income; if they have previously paid the contract fee for 20 years, they can stop paying the fee and use the accumulated money in the contract to maintain protection benefits, especially accident and critical illness benefits.

The figure of 5-8% of annual income should be used as a reference when calculating the insurance budget (Photo: Manh Quan).

Buy insurance up to 5-10% of income

What percentage of annual income is reasonable to spend on insurance?

- When answering the previous question, I gave the figure of 5-8% of income. In developed countries, the minimum insurance purchase rate is 2-5%. However, there are 2 points to note.

One is that their standard of living is high. It can be understood that if they move to live in our country, their income can be classified as that of the rich, and 2-5% of the rich's income is a significant number compared to the average and low income levels.

Second, their life insurance may not come with a savings component, while in our country, the majority of life insurance has a savings component, so if it is just protection, it can take up 3-4% of income, but when adding the savings component, it will increase to 5-8%.

Even at this level of 5-8% of income, we should not be rigid. For example, a person has had an income of 30 million VND/month for many years. Recently, the income has increased dramatically to 80 million VND/month, but this new income is not really sustainable and stable, so the income level chosen to determine the budget for buying insurance is somewhere around 50 million VND/month.

In addition, it is necessary to consider the savings rate and the need to use this surplus cash flow of individuals and families who want to prioritize increasing assets or protecting finances.

Suppose, the savings rate is 30% of income and if you want to focus on investing to increase assets, then spend 25% on investment, save the remaining 5% to buy insurance. However, for individuals and families who value protection needs and want many insurance benefits, they can increase the insurance budget to 10%, for example.

Source: https://dantri.com.vn/kinh-doanh/imoney-danh-bao-nhieu-thu-nhap-de-mua-bao-hiem-la-hop-ly-20230412162642513.htm