Introduction
Insurance and investments are two of the essential parts of personal finance. However, insurance is vital as it would help you overcome the financial difficulties that may arise due to unprecedented developments in this modern world of uncertainties. We’ve covered the following in this article:
What exactly is insurance?
Insurance is an agreement between an individual (the person purchasing insurance) and an insurer (usually a company). The insurer would provide the insured with financial protection against certain types of losses. The insurer assumes the risk in return for timely premium payments on specified dates.
There are different types of insurance for different assets. The most popular are health and term insurance. Health insurance is a type of insurance that protects the insured against the probable medical expenses resulting from a health emergency that results in hospitalization.
Term life insurance provides financial protection for the insured’s dependents if an unfavorable event takes the life of the insured. In such cases, the term life insurance pays out the insured amount of the policy to the beneficiary of the term life insurance. This is done against the annual premium to be paid by the insured.
Benefits of insurance.
Insurance benefits individuals, organizations, and society in more ways than the average person thinks. Some of the benefits of insurance are obvious, others are not.
- The most obvious and important benefit of insurance is the payment of damages. An insurance policy is a contract used to compensate individuals and organizations for covered losses.
- The second benefit of insurance is managing cash flow uncertainty. Insurance pays for covered damages when they occur. Therefore, the uncertainty of paying losses out of pocket is significantly reduced.
- A third and unusual benefit of insurance is compliance with legal requirements. The insurance meets the legal and contractual requirements as well as proof of financial resources.
- The fourth and another very important benefit of insurance is the promotion of risk control activities. Insurance policies provide incentives to implement a loss control program due to policy requirements and premium savings incentives.
- The fifth benefit of insurance is the efficient use of an insured’s resources. Insurance companies eliminate the need to hold large sums for the financial consequences of insurable exposures. This allows the money to be used more efficiently.
- The sixth benefit of insurance is support for the insured’s creditworthiness. Insurance facilitates lending to individuals and organizations by guaranteeing that the lender will be paid if the collateral supporting the loan is destroyed or damaged by an insured event. This reduces the lender’s uncertainty from the borrowing party.
- The seventh benefit of insurance is that it is a source of mutual funds. Insurance companies charge premiums upfront, invest those premiums in a variety of investment vehicles, and pay claims as they arise.
- The final benefit of insurance is the reduction in social burden. Insurance helps reduce the burden of uncompensated accident victims and society’s insecurity.
Understanding these benefits is critical to analyzing insurance needs and helping policyholders justify purchasing insurance.
What is investing?
Investing is an act of using your money to purchase capital investments such as stocks, bonds, etc. to generate an income stream in the future. Some people invest to realize capital gains, which is the difference in price between the cost of buying and selling.
Investing is the only way to grow your money. Investing helps you reach your financial goals sooner. Just saving money doesn’t help you get rich. To do this, you need to invest your money in suitable investment opportunities.
Benefits of investments.
Firstly investment makes You Stay Ahead of Inflation.
- If you don’t invest and grow your money, you’ll end up losing money over time. This is all thanks to inflation.
- Inflation is the general increase in prices that happens every year and the decline in purchasing power of your money. The rate of inflation can vary widely but historically inflation has averaged to around 3%.
- If you invest your money and say, earn a rate of return of 7% on average, then you’ll stay way ahead of inflation and will be to increase the value of your money.
Secondly Investing Will Help You Build Wealth.
I think this should go without saying, but I’m going to say it anyway: Investing is how you build wealth.
There are a hundred and one ways to invest and grow your money. If you’re serious about building wealth then you need to create an investment plan that suits you and your goals.
The wealthy invest, the broke do not.
Thirdly Investing Will Get You to Retirement (Or Early Retirement)
To have enough money to retire you need to make your money work for you. Like we illustrated above, leaving your money sitting in savings will work against you!
The more you invest the more you’ll be able to take advantage of the power of compound interest.
Compound interest is what happens when you’re interest starts earning interest.
Fourthly Investing Can Help You Save on Taxes
Another HUGE advantage of investing in your ability to save on taxes!
For example, the money you put into a 401k, SEP IRA, or Traditional IRA is not taxed the year you earn it. Instead, you pay taxes on it when you withdraw during retirement. This saves you a lot of tax dollars the year that you contributed.
If you’d rather pay tax now you can elect to use a retirement account like the ROTH IRA. With this option, you pay tax now and don’t pay any tax when you withdraw.
These are just basic examples. There are tons of loopholes in the tax code that favor investors. This is how the rich stay rich and pay so little in taxes!
If you need to lower your tax burden I’d highly suggest you speak with your CPA or Financial Advisor to come up with a custom investing plan that will meet your specific needs.
Fifthly Invest To Meet Other Financial Goals
You can also consider investing to help grow your money to meet other financial goals. For instance, investing in your child’s college fund.
When you have a long-term goal of ten or more years it may make sense to invest that money to help you reach your goal faster!
There are many benefits of investing. If you want to create financial stability, grow your wealth, and stay on track for the retirement you need to come up with an investing plan that suits your needs.
After knowing what insurance and investment are all about, you may be a little confused about whether to invest first or to insure first.
Read Also: How to Start Earning from Home: Quick Cash Tips for Any Schedule
Insure first or invest?
In this modern era of uncertainties, it has become imperative to protect oneself from all sorts of financial dangers, which is beneficial for individuals and their loved ones. At the same time, the ever-increasing rate of inflation has made it extremely important for individuals to start their investment journey as early as possible. The first question that arises here is whether you should insure or invest.
With the right insurance policies protecting you from potential financial loss due to unprecedented developments, it is of the utmost importance to insure yourself first. With term life insurance, you get a high sum insured for a low annual premium. All the more reason to take out insurance before investing.
How should you approach insurance?
The modern world is such that you are not sure what is going to happen in the next minute. Medical technology has evolved, as have the viruses and bacteria that cause disease and infection. If you end up in a hospital bed, you’re probably spending a fortune paying your medical bills. This required getting the right health insurance.
Health insurance should provide you and your family members with adequate medical protection. You need to make sure that the policy covers most of the diseases that your family members are susceptible to and that there are multiple hospitals in their network. The right health insurance will save you high medical bills. Not to forget, the premium for health insurance should be reasonable.
If you are the breadwinner of your family and an incident results in your death, your family members will be left without income. To avoid such a scenario and secure the future of your family, you should get term life insurance.
The premiums are affordable and term life insurance offers a large sum insured that would be enough to cover your family’s expenses and sustain the lifestyle you offer. Term life insurance is cheap when taken out at a young age. Therefore, you should take out term life insurance at the earliest.
See Also: 5 things to invest on in 2024
How should one go about investing?
Insuring before investing is always a good move. However, you should not delay the investment. You need to start investing from a young age to see higher returns over time. However, you must be aware of the risk involved in your investment and should avoid options whose level of risk does not suit your profile.
If you’re a risk-averse investor, you may consider investing in bank deposits (FDs and RDs), government savings plans, bonds, and debt mutual funds. If you’re a slightly aggressive investor, you can invest in hybrid funds and equity-linked investments. If you’re willing to take significant risk in exchange for higher returns, you can invest directly in stocks and mutual funds.
Regardless of the investment option you invest in, you need to ensure that your objectives are met and that the risk level of the investments is consistent with your risk tolerance.
Conclusion
Insurance and investments are two of the most important parts of your financial plan. You need to make sure before you start investing. However, you should delay your investments as inflation eats away at your savings and the best way to achieve your financial goals is to invest.
