Budgeting for Comprehensive Personal Insurance Coverage: How Much Should You Set Aside?

At a glance:

• Allocate 3% to 10% of your net income to personal insurance based on your income level and financial responsibilities.
• Follow a step-by-step approach: calculate take-home pay, determine your budget, assess your risks, prioritise the right cover types, and compare quotes.
• Match policies to key risks. Prioritise Income Protection if you’re reliant on your salary or Trauma Insurance if you have a family history of illness.
• Avoid common mistakes like underinsuring, choosing coverage on price alone, and failing to update coverage as life and income change.

 

 

When life is running smoothly, it’s easy to put personal insurance in the “later” basket. But if illness, injury, or unexpected loss strikes, the financial impact can hit hard and fast. That’s when you wish you had personal insurance, not as a luxury, but as a buffer between you and economic stress. 

Still, many Australians avoid it because they think it’s expensive or don’t know how much to set aside.

The truth? You don’t need a huge budget to get meaningful protection. A well-planned insurance budget can provide valuable peace of mind.

This article will help you understand how to budget effectively for comprehensive personal insurance coverage, so you can protect what matters most.

 

 

How Much of Your Income Should You Budget for Insurance?

 

There is no strict rule on how much of your income should be allocated to insurance. However, many financial planners suggest setting aside between 3% and 10% of your income to cover a range of personal insurance needs. The exact amount will depend on your individual income and circumstances. As earnings increase, your capacity to invest in more comprehensive coverage typically grows.

Here is a general guideline you can consider: 

• Income under $4,000/month: 3–5%
• Income $4,000–$8,000/month: 5–7%
• Income over $8,000/month: up to 10%

For example, if your net income is $7,000/month, allocating 6% would equate to around $420/month for insurance cover. 

It can be useful to spread this budget across different types of insurance policies to provide more balanced protection. For instance, a $420 monthly budget might be split as follows:

• Income Protection Insurance: $200
• Trauma Insurance: $100
• TPD Insurance: $70
• Accidental Death Insurance: $50

 

 

Step-by-Step Process: How to Set a Personal Insurance Budget

 

If you are confused about where to begin with your personal insurance budget, you’re not alone. Many Australians put off getting personal insurance because the budgeting part feels overwhelming. But when you break it down, setting an insurance budget is straightforward. 

Here is a step-by-step approach that can help you get started with insurance budgeting. 

 

Step 1: Calculate Your Monthly Take-home Income

 

The first thing you need to do is calculate your net monthly income. This means the amount that is deposited in your checking account after tax, superannuation, and other deductions. This can be easy for individuals with a job and a fixed salary. 

However, if you have an irregular income, like a business owner or freelancer, coming up with an exact amount might not be possible. In this case, you can calculate a monthly average based on your income over the past 6 to 12 months.

For example, if your salary is $85,000 per year and you take home around $5,000 per month after tax and super, that’s your base number to work from. 

 

Step 2: Allocate 3–10% of that for Personal Risk Protection

 

Once you know your take-home income, the next step is to allocate a portion of it for insurance. A common recommendation is between 3% to 10%. This decision is highly dependent on your financial situation, age, and lifestyle. For example, if you’re younger, have fewer financial responsibilities, or are just getting started, even 3% is a strong beginning. 

However, if you have a family to look after or you’re the sole breadwinner of the family, you will need to allocate a higher portion of your income to ensure that you and your family are financially protected in any circumstances. 

 

Step 3: Identify Your Biggest Risks 

 

After you have determined how much you are going to invest in insurance, identify your biggest risks. This will help you protect yourself appropriately. The risks include factors like health and dependents. Even if your risk factor is job security or existing debt, you need to consider them, too. 

Start by evaluating your dependents, like children or a non-working partner. You should also consider large debts like mortgages and car loans, as they can significantly impact your financial needs if you experience illness, injury, or other unexpected events. Other risk factors include a family history of serious illness or a high-risk job. 

For example, a sole-income household with young children and a mortgage may need to prioritise Income Protection and Total Permanent Disability (TPD) Insurance. On the other hand, if you are in your mid-20s with no debt, you might focus on Trauma Insurance due to a family history of illness.

 

Step 4: Prioritise Policies that Match your Risks

 

Now comes the most important step: prioritising policies. There are many types of insurance policies, and all of them offer certain value. However, the importance of each policy varies as per individual needs. So, always focus on what’s most relevant to your situation. 

Here is how you can prioritise:

• Income Protection Insurance: Ideal for anyone who relies on their salary to meet day-to-day living expenses. It helps replace your income if illness or injury prevents you from working temporarily.
• Trauma Insurance: Particularly valuable if you have a family history of critical illness and want a lump sum to support recovery after a serious diagnosis, such as cancer, stroke, or heart attack.
• TPD Insurance: Ideal if you work in a physically demanding role or carry significant debts, such as a mortgage. It provides a lump sum if you become permanently unable to work.
• Accidental Death Insurance: Suited to those in high-risk occupations or anyone seeking affordable cover to help protect their family financially in the event of accidental death.

 

Step 5: Shop Around for Quotes and Adjust the Budget to Match Actual Costs

 

Many insurance providers might meet your needs, so don’t settle for the first quote you get. Contact reliable insurers within your area and compare their features and services. 

For instance, read the Product Disclosure Statement (PDS) to understand the policy in detail, including what’s covered and what’s excluded. Factors such as waiting periods and benefit periods for insurance, such as income protection, should also be considered.

Finally, make sure your insurer is reputable and regulated by ASIC. If premiums are higher than expected, consider increasing waiting periods, lowering benefit amounts, or starting with core cover and upgrading later.

 

 

Prioritising Cover Within Your Budget: Based on Personal Needs

 

When deciding which insurance policies to include in your budget, think about which risks pose the greatest threat to your financial stability. Consider your stage of life and income level. In addition, always consider your dependents and health status. All of these factors influence what kind of coverage you need most. 

Use the guide below to understand the purpose, suitability, and key features of each major insurance type and then build from there based on your circumstances. 

 

Insurance Type	Who Needs It Most	Why It’s Essential	Key Features to Consider
Income Protection Insurance	Employees, self-employed individuals, and sole income earners.	Replaces your income if illness or injury prevents you from working temporarily.	Covers up to 70% (85% in some cases) of income; waiting and benefit periods vary; tax-deductible.
Trauma Insurance	Individuals with limited savings or a family history of serious illness.	Provides a lump sum for medical costs or recovery support after diagnosis.	Covers conditions like cancer, stroke, heart attack; no waiting period.
TPD Insurance	Homeowners, parents, and people with large debts.	Offers a lump sum if you’re permanently unable to work due to illness/injury.	Definitions vary (own vs any occupation); it helps pay off debt or cover care costs.
Accidental Death Insurance	Budget-conscious individuals and workers in hazardous jobs.	Offers a death benefit to beneficiaries if you pass away from a covered accident.	Lower premiums than life insurance; it only pays for accidental death.

 

If your monthly budget is limited, say around $150 or less, you can still build meaningful protection by focusing on the essentials first. It is also possible to maintain coverage or adjust your policy mix during times of financial instability. 

Start with Income Protection Insurance (approx. $90–$100/month), especially if your livelihood depends on a regular paycheque. This type of cover helps replace your income if illness or injury prevents you from working temporarily. 

If you have room in your budget, consider adding Trauma Insurance (approx. $30–$40/month), particularly if you have no emergency savings or a family history of serious illness, as it provides a lump sum to support your recovery. 

For those seeking a cost-effective safety net, consider Accidental Death Insurance (approx. $10–$20/month), which can offer a basic benefit to your loved ones without the cost of full life cover. 

As your income grows or circumstances change, review your policy mix annually and consider upgrading to include TPD Insurance or broader life insurance cover. 

 

 

Common Mistakes to Avoid When Budgeting for Insurance

 

Even with good planning, some common mistakes can impact your insurance outcomes. Here are a few to avoid:

• Choosing a policy based solely on price. Low premiums often come with exclusions or long waiting periods.
• Overlooking existing sick leave or emergency savings. These can affect how much coverage you really need.
• Assuming public healthcare will cover everything. Medicare doesn’t replace lost income or cover out-of-pocket costs for all critical illnesses.
• Forgetting to review premiums and account for inflation. Costs can increase over time, and you should factor this into your annual budgeting process.

 

Personal insurance is ultimately about protecting the life you’ve worked hard to build. Whether you’re covering the basics or planning for the long term, having the right cover in place can make all the difference when things go wrong. 

You don’t need to spend thousands to be protected. All you need is a clear understanding of your income, your risks, and your priorities. Start with what you can afford, focus on what matters most, and build from there.

Not sure where to start, or how much cover might suit your needs? Explore your options with Aspect Underwriting and take the first step towards building smart, personalised protection.