We all are aiming for financial security. Yet, this word has different connotations for each of us. Some of us want to keep our families safe from sudden fiscal uncertainties while others aim to create a corpus for a comfortable ahead. The choice between “security” and “wealth” gives way to a debate between “insurance” and “investments”. Many investors, especially the salaried class, are unsure of what to prioritize.
Insurance or investment?
The two essential pillars of finance, viz., “Insurance” and “Investments” come to our mind regarding securing enough money for our loved ones. Well-planned investments when continued for the long run help create finances that ease life while also helping to enjoy it. Insurance protects against the downside or any untoward event that may push your family to unwanted financial dependence.
Muthukrishnan, Chennai-based Certified Financial Planner says, “No point in starting investing before obtaining adequate risk covers. If any of the risks occur, having no insurance cover implies a bleak future for the family. Insurance first. Investment next. Term and medical cover must before you begin your investing journey.”
It is best to have both, though people must consider buying insurance at the beginning of their careers to protect the future of their loved ones. Also, those working in low-paid jobs may find it difficult to save and invest enough, which again underscores the importance of the insurance amount. There is no formula or thumb rule to tell you which to prioritize. A lot depends on your current financial status, lifestyle and responsibilities. The idea is to be rational depending on your understanding of finance.
Insurance versus investment
Many people inquire about insurance versus investment. However, it must be insurance vis-à-vis investments. This is because they are both elements of finance that are used differently depending on investors’ financial goals. Insurance secures and protects. Investment helps create a corpus that in turn enhances the purchasing power of investors and cushions them against the effect of inflation in the future.
“To each, his own” is the mantra one must follow to decide the kinds of insurance and investment plans to buy. You may start by first buying a health insurance policy that will secure you against unforeseen hospitalization and subsequent treatment expenses. Having a life insurance policy will ensure your nominees the much-needed financial backup needed to pay for essential and daily expenses. Then, comes investment that relies on the power of compounding to make you financially independent.
What and when to choose?
Look around yourself. Do you have dependents relying on your income? If yes, do not forgo the idea of buying a life insurance plan. However, those with no financial dependents can focus on their economic well-being without having to worry about financial loss in their absence. They can start by parking their money in a simple index plan and then move to other equity instruments depending on their risk appetite. Setting aside a bit for emergencies helps. Some allocation to debt funds helps to protect the downside in case of excessive market turmoil.
You may not have the necessary financial cushion to get into both insurance and investments. In that case, allocate to the one that would serve your interests best and then move on to the one that will ensure you and your family adequate financial support in the near and distant future.
No matter wherever you put your money, make sure to stay committed. Irregularity in paying insurance instalments or SIPs will derail your financial plans.