Defining Affordability

• When you think about affordability, you usually associate the term with the current payout of cash and your income. If insurance premiums are too high, then you might not be able to afford other bills that take priority. However, in some cases, failing to purchase insurance can mean facing potential bankruptcy because you cannot afford the large expense once an accident or untimely death occurs. Therefore, affordability, when paired with insurance, is a measure of both current payouts and future risk of a large payout.
  
  

Cost Components

• The cost components pertinent to an insurance policy are the premium payments, the opportunity cost of making those payments and the financial risk you are placing upon yourself if an accident should occur. The opportunity cost of making premium payments is what you give up when you have to pay the monthly or annual payment. Premium payments are composed of the risk that the insurance provider sees in providing you with a policy and the amount you select for your deductible.
  
  

Considerations

• In choosing how much you can afford for insurance, consider your children, how much debt you have, your level of risk and what you can afford to pay if an accident occurs. For example, if you have a large amount of savings and little responsibility, such as no children or excessive debt, then a high deductible plan may be right for you. If your opportunity cost in buying insurance is not affording a new automobile and you have a large mortgage, children and relatively little savings, you might want to consider purchasing a plan with a greater benefits. These typically have a much higher premium, however.
  
  

Out-of-Pocket Expenses Without Insurance

• When an accident or untimely death occurs, it can be detrimental to a family without the proper amount of insurance. Mounting medical bills, a new car, inability to afford mortgage payments or daily living expenses are all reasons that people choose a significant payout amount with their insurance policy. These are stressful situations which can put a financial and emotional strain on the family. However, for those which can afford to take that risk, investing the dollars that they would otherwise spend on monthly premiums can prove to be of greater benefit.