Budgeting: Necessary expenses

There are certain expenses such as food and housing that will naturally be included in your budget as they are “necessities”, but then there are other necessary expenses that some may feel are a waste of money. These are often the first expenses to be reduced when trying to save money when actually these are crucial expenses that should be budgeted for in all circumstances… I’m talking about insurance.

There are 5 mains kinds of insurance which I think should always be included in your budget or spending plan, namely:

• Life insurance
• Income protection, critical illness and disability cover
• Medical aid
• House insurance
• Car insurance

I am going to explain each of the above kinds of insurance and why I think they should be seen as necessities when setting up your budget. My aim is not to push any products but to give you all the information necessary so that you are able to make an informed decision for what would suit your needs best. Life is uncertain and it throws curveballs and I want you to be able to deal with whatever life throws without having to worry about the financial aspect.

Life insurance

Life insurance is needed if anyone in your life relies on your income. Some employers offer life insurance as a benefit so I recommend checking this before taking out additional cover that may not be necessary.

If you are a stay-at-home parent, you still need to consider getting life insurance as your spouse may need to hire someone to take care of the children or possibly cut down on working hours themselves which could lead to a reduction in their salary.

The death benefit of your policy will differ from person to person, but a recommendation is to have your death benefit equal the amount of capital needed to produce the monthly passive income that your beneficiaries need.

Income protection, critical illness and disability cover

I hope that you will never need this kind of insurance but unfortunately life happens and sometimes we are placed in situations that we never thought were possible or would happen to us.

Critical illness (also known as dread disease) and disability cover will pay out a lump sum shortly after diagnosis, should the case meet all the necessary criteria. This money can be used to cover additional medical bills and lifestyle changes that may be necessary as a result of the disease or disability.

Income protection pays out a monthly amount to you if you are unable to work as a result of illness, impairment or disability.

It is important when taking out these kinds of insurances that you read all the fine print carefully so you are aware of exactly what is covered and what isn’t.

Medical aid

Medical aid is often something that healthy people feel is a waste of money, but hospital bills can be extremely expensive and can add up quickly so I would recommend at least considering a hospital plan to cover you in the case of an emergency or a big procedure.

There are many different medical aid schemes and options available so I would advise speaking to an independent financial advisor, who isn’t linked to a specific company, to help you decide which option would be best for you.

House insurance

There are 3 kinds of house insurance:

1. Building insurance

This insurance is needed if you own a property as it covers the actual structure should it be destroyed.

Here are a few things to check or keep in mind when using this type of insurance:

• You need to be covered for the cost of rebuilding i.e. replacement cost. Do not take out cover for the market value or purchase price as these amounts could lead to being over- or under insured.
• Does your coverage increase every year to keep up with construction costs?
• What events are not covered?
• What coverage do you have in the event that you are unable to live in your home due to damage?

2. Contents insurance

This insurance is for all the contents within your home such as furniture and appliances.

3. Portable possessions insurance

This kind of cover is for valuable items that you carry around with you daily or when you travel such as jewelry, sunglasses or an expensive camera.

Not all of the above will be applicable to everyone and the extent of coverage will vary greatly depending on each household’s situation but it is important that everyone has at least some form of house insurance. You may think that your household items aren’t worth very much, but if you had to add up the cost of replacing everything in your house, it will add up to a significant amount.

Car insurance

There are 3 types of car insurance

1. Third party only

This is the cheapest type of car insurance and only covers damages incurred to third parties in an accident. This insurance does not cover anything related to your car.

2. Third party with fire and theft

This insurance covers the same as above, as well as your own car in the following events: hijacking and theft as well as losses incurred as a result of fire, lightning or explosions.

3. Comprehensive cover

Again, this covers everything mentioned above, but also includes cover for your car in the event of an accident or natural disaster.

This is the most expensive type of car insurance and is usually a requirement if the car is being financed.

The type of car insurance needed will differ from person to person but it would be a little irresponsible to think you can get away with not having any kind of car insurance, unless you have significant amounts of spare cash lying around for emergencies.

So that is a basic summary of all the kinds of insurance that you should most likely make use of. I know that thinking about the worst-case scenario isn’t something anyone likes to do, but unfortunately it is something that we should all prepare for.