Invest or Insure – Which to Pick First?

  • Rudri Rawell
  • Oct 12 2021
  • 6 minutes
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Investing and buying insurance, both have unique benefits and are advisable for anyone who wants to plan out their finances. Insurance experts often advise people to buy insurance at a young age. Investments too are important to be focused upon from time to time, as one can earn maximum returns by staying invested for a longer duration. However, the dilemma that most of us often face is whether to invest or insure, which to pick first, especially during the start of a career or starting off with financial planning, for instance. 

With limited income and many expenses to cover, we may find ourselves in a fix with regards to prioritising investment over insurance or vice versa. Here, we will try to address this often-asked question for easy decision-making on which one to pick first.

What are the benefits of investment?

Here are the top reasons why you should begin investing as early as possible:

1. Improved spending habits

Most individuals have limited disposable income at the start of their careers. From the limited income, we all wish to spend some and save some for future needs. Setting aside savings means a lesser amount available for spending. However, by making savings a habit, we can create a larger corpus in the long run and improve our spending habits. 

To make it easier, you can set aside a portion of your earnings every month as savings. Once you know the amount available for spending, you can start chalking out a budget. Suppose you earn Rs. 50,000 per month and wish to save at least Rs. 20,000 per month. Once you receive your income, you must set aside Rs. 20,000 as savings and prepare a monthly budget using the remaining Rs. 30,000. With the savings of Rs. 20,000, you can plan your investments such that it results in wealth creation over time.

2. Benefit of compounding 

The earlier you start investing, the more benefit you can avail from compounding returns in the long run. Here is an example to understand how it works:

Suppose you want to create a corpus of Rs. 2.5 crores for your retirement. With this objective, you begin investing in an equity mutual fund that offers average returns of 12%. You start investing at the age of 22 with Rs. 2,600 as the monthly investment for 38 years. Thus, the net investment would be Rs. 12 lakhs approximately and the above-mentioned returns, can help you set up the targeted corpus.

In another example, with the same goal, you begin investing much later at the age 45. Thus, you will need to invest at least Rs. 50,000 every month for the next 15 years to arrive at a net investment of Rs. 90 lakhs. This can fetch you Rs. 2.5 crore after 15 years if the returns offered are same as mentioned in the earlier example.

Compounding benefit comes through long-term investments and allows one to invest smaller portions. The earlier you begin investing, the smaller the amount of investment, and vice versa.

Additional read – Stocks or Equities. Where should I invest in?

Why should you get insurance first?

When it comes to health insurance, irrespective of your age, you should have one, as sickness or health emergencies can arise at any time unannounced. In absence of health insurance, medical expenses can be very high. Especially if you have just started earning, you may have limited funds at your disposal. Therefore, you should ensure to have a health cover at the earliest.

Many people often avoid buying term life insurance with a false assumption that young and healthy people do not require it. However, buying term insurance early on is beneficial for these reasons:

  • Low premium cost – Buying a term life insurance early on in life means lower premium cost as compared to the premium amount that will be required for buying a term insurance later on in life.

For instance, if you want to buy term insurance of Rs. 1 crore with a tenure of 75 years, you must buy it at 25 to pay a low premium amount of Rs. 8,000 per year. If you buy the same plan at 30 years, the premium cost will be Rs. 10,000 and at 45, it will cost Rs. 30,000.

  • Protection for family – The sooner you want protection for your family against financial troubles that may arise in your absence, the sooner you must buy term insurance. Whether it is your parents, partner, or children, if they are dependent on you financially, a term insurance can protect them against any future financial burdens. 

What’s the verdict – whether to invest or insure first?

Looking at the benefits of early investment and insurance bought early in life, it is best to go for both simultaneously, as each has unique benefits to offer that cannot be replaced, combined, or prioritised.

As life is all about uncertainties, it is important to protect ourselves and our dependents against any financial issues that may arise. Inflation continues to be on the rise. Thus, we must start investing at the earliest. Similarly, the right insurance policy can protect us against any financial losses coming out of unexpected developments. Those who cannot afford to go for both must weigh the benefits of each investment and insurance, and take their decisions accordingly.

Conclusion

No matter what stage of life one is in, it is best to avoid mixing up investment and insurance. Both are exclusive and important in one’s financial planning. Therefore, always set aside some portion of your income for investment and some for insurance. 

FAQs

Does insurance come under-investment?

Insurance is not a form of investment. Therefore, it does not come under investment and has to be treated exclusively for obtaining its unique benefits.

Which is the best investment option?

Mutual funds are considered as one of the best investment options since these come in different formats with varying risk levels and return benefits. All types of investors, new or experienced, risk-averse or risk takers, can invest in these.

Should I buy life insurance or health insurance?

Life insurance and health insurance, each offers different and unique benefits. While a life cover provides financial support in case the policyholder’s life comes to an end, health insurance provides financial assistance in case anything happens to the insured’s health

How is insurance related to investment?

An investment such as a mutual fund helps in wealth creation to meet financial goals, while an insurance plan protects one against unforeseen situation or eventuality. Mixing up the two results in insufficient life insurance cover and lower investment returns

What would be the first thing to do before investing?

Before starting with any investment, one must chalk out specific financial objectives, risk/return comfortability, available options for investment, and basic research on chosen investments. It is also advisable to set aside an emergency fund before allocating funds towards investment.

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