Skip to Content

How Much Should You Spend on Insurance Policies?

One of the major challenges of adult life is creating (and sticking to) a budget — although the majority of Americans have a household budget, most of them overspend and often use credit cards to cover that overspending.

But sometimes it’s difficult to know just how much you should be spending on things, especially when it comes to something as complex and flexible as insurance. How much do you need? Are you paying too much for your coverage? Are there things you can do without? Read on for answers.

How Much Should You Spend on Insurance Policies?

Insurance: The Absolute Essentials

First, let’s talk about what kinds of insurance you must (or definitely should) have.

  • Home Insurance. Your home is one of the most valuable assets you’ll ever have, and one of the most lucrative investments there is. That’s why it’s crucial to have it protected against disaster or theft. If you have a mortgage, you’ll likely have no choice in the matter: home loans almost universally require a home insurance policy to protect the bank’s investment. The average annual expenditure for home insurance in the US is about $1200.
  • Car Insurance. If you own and operate a vehicle, you’re legally required to have car insurance almost everywhere in the United States — and even if you’re not, it’s a potentially disastrous decision to go without it. While car insurance can vary a great deal by provider, location and other factors, the average annual expenditure is from $1000 to $2000 per vehicle. Make sure to shop around and compare car insurance quotes to get the best rate.
  • Life Insurance. Providing financial security for your loved ones is an important part of many people’s lives. Life insurance costs are even more variable than auto insurance, depending heavily on age, health status, coverage amount, and more. Generally speaking, the older one gets, the more expensive life insurance premiums are, unless you get into a fixed rate earlier in life. Overall, Americans spend approximately $500 to $700 annually on life insurance premiums.
  • Health insurance. Of particular concern in America is health insurance, which can be difficult to obtain and afford, but is crucial to avoiding the exorbitant costs of American healthcare. According to data from the United States Bureau of Labor Statistics, the average American pays around $5,000 yearly for health insurance premiums. Like the other forms of insurance listed above, however, this figure can vary dramatically.

Options for Additional Coverage

Depending on your circumstances, there may be some additional types of coverage you might want or need. For example disability or critical illness coverage may be worth considering if you or a family member has need of coverage (or is likely to need it in the future).

Disability insurance can offer income replacement should you be unable to work during an injury or illness, while critical illness coverage will offer financial relief if you’re met with a dire medical diagnosis.

How Much Should You Spend on Insurance Policies?

Optimizing Your Insurance Spending

As previously mentioned, everyone’s insurance needs are different. Maybe you own a car or a home, or maybe you don’t — so there may be certain types of insurance you don’t need to worry about. But regardless, there are a number of strategies for bringing those premiums down, or at least get the most out of your insurance spending. Here are some common tips:

  • Evaluate your life insurance needs. As life goes on, your financial and personal circumstances are likely to change dramatically, and stopping to reassess the necessity of your life insurance — or just the amount of coverage you have — makes smart financial sense. This is especially true if some major expenses (like a mortgage) have been paid off, or dependents no longer rely on you for support.
  • Trim unnecessary policies. Make sure you aren’t paying for any redundancies or unnecessary coverage, such as vehicle extended warranties, mortgage life insurance, or car rental insurance. These are generally not necessary (as they are covered by other policies) and can be eliminated.
  • Bundle your policies. Most insurance companies will offer you a discount for bundling policies together, such as your home and auto insurance. If you don’t own a home, you may even be able to do this with renter’s insurance.
  • Comparison shop. One of the most reliable ways to lower your insurance premiums is to shop around and see what else is available. There are numerous free online tools you can use to do just that.
  • Engage in healthy living. This is particularly important when it comes to health insurance. Adopting a healthy lifestyle can help mitigate or avoid long-term medical issues and the expenses that accompany them. Exercise, balanced nutrition, and preventative health care measures can reduce the likelihood that you’ll need costly medical treatments — and may lower your insurance premiums accordingly.

There is no one-size-fits all for insurance options so it’s important to truly evaluate your current and future needs.