Insurance as an investment vehicle


We discussed the need to hedge risk and how it is assigned a value. Risk coverage is paramount to financial planning, especially for someone with dependents. Having covered the risks, we will now look at capital budgeting to achieve our dreams of achieving our various financial goals, the ultimate being to achieve financial freedom.

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There are various financial instruments available nowadays to achieve your financial goal. Your ability to take risks, the income available for savings and your age determine how quickly you can reach your goal.

Discipline not desires determine your destiny

One of the biggest differences between a successful investor and an unsuccessful one is discipline in investing. Discipline is doing what you know should be done, even if you don’t want to.

Either out of a sense of responsibility or fear of social stigma, people are generally disciplined in the provision of their monthly payments which take care of their various debts. However, when it comes to regular investing, they generally tend to break this discipline. This is seen in people who are on a tight budget and would succumb to indulgence rather than disciplined investment.

The insurance associated with an investment product takes care of this indiscipline. The possibility of losing premiums paid for insurance indirectly requires a disciplined approach to investing. This is a slightly more expensive route than using a term insurance policy and investing the excess separately, but the long-term benefits, especially due to disciplined and regular investments, give better results.

Other advantages

Disciplined and regular investments as well as risk coverage are not the only advantage of insurance as an investment vehicle. Insurance products are designed by some of the best mathematical minds in the world. The products are structured so that you can receive lump sum payments at regular intervals after a threshold period. These payments can be designed to coincide with your financial goal. Likewise, they can provide a steady stream of income after retirement. Or they can be made to meet your child’s needs in the event of an untoward incident.

It can be argued that withdrawals from any other form of investment can be used to meet similar demands. But since most investments are in debt securities, a partial withdrawal will require either the pre-closing of the entire investment, which would result in a loss of income.

Let’s see how life insurance compares to other traditional forms of investment.

Life insurance versus public provident funds:

In a life insurance policy, the candidate gets the entire sum insured if the policy holder dies at any time. On the other hand, in a public provident fund (PPF), the candidate will receive the amount that has been deposited in his account. PPF standards are much more rigid and do not offer the flexibility of an insurance policy. PPF accounts have a fixed long-term duration while insurance offers short-term and long-term flexibility. Additionally, the insurance policy is considered more liquid due to partial withdrawals and the partial withdrawal option.

Life insurance versus term deposits:

Term deposits have a shorter duration than life insurance and must be renewed regularly. Compared to this, an insurance policy can be held for a longer duration. Partial withdrawals are generally not possible in term deposits, which is not the case with insurance policies.

Life insurance versus mutual funds:

The main difference between the two is the element of risk coverage provided by an insurance policy that is not covered by mutual funds. Insurance contracts offer all the flexibility of a mutual fund and provide the insured with risk coverage. Investing through an insurance policy prevents the policy holder from guessing after the fact and prevents him from withdrawing or being the fund manager himself and blocking the investment or moving his investments at the wrong time and destroy his capital.

Insurance and campaign building

Adding a patriotic flavor to insurance, savings in insurance are considered long-term savings and are a preferred source of finance for long-term projects such as ports, hydel hydroelectric projects or road projects compared to other banking economies.

A big advantage that insurance brings to the table is that it reflects on behalf of the policyholder. Most people are either too busy with their lives or lack the insight needed to design a financial plan for their lives. Insurance products provide that element, whether it’s a children’s plan or a retirement benefit plan.

At this point, we would like to invite readers to comment on the various pros and cons of insurance as an investment tool.

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