Insurance or Investments. What should you do first?

Insurance and risk management are critical aspects of a financial plan. Just like how it is important to learn how to walk before you learn how to run, it is important to safeguard your personal finances and insure yourself first, before you move ahead and build a portfolio for your goals.

Insurance is a great tool to safeguard your finances as it allows you to transfer your risk to other members in the insurance pool. This ensures that you and your family are protected financially in case of an unfortunate event.

The various types of insurance cover one should have are;

Life Insurance

One should have a life insurance if they have financial dependents. Having a life insurance ensures that your loved ones can lead the same quality of live in your absence. Unless the family has multiple sources of income, if the primary earning member dies, the income of the family is reduced significantly and members will have to face hardship to sustain their day to day activities. Few important aspects when choosing life insurance;

Purpose of Insurance

It pains to see people confuse insurance as an investment instrument and even worse when insurance is looked purely as a tax saving instrument. Sadly it’s neither of them. The main objective of insurance is to protect your loved ones.

Anyways choose Term Life Cover

Very low awareness makes it easy for commission oriented insurance salespeople to promote high expense, low return traditional insurance policies. Polices like whole life, money back and endowment insurance do not provide adequate cover leaving individuals with high risk. Term insurance policies provide higher coverage for every rupee of premium paid. For instance, a 30 year old can get a term cover of ₹ 1 crore for less than 800 pm, in comparison to 10 times premium cover provided by traditional policies.

Adequate cover

One can take help of a financial planner to arrive at the adequate insurance cover needed for the family. The planner will analyze and suggest an insurance cover either through “Need Based Analyses or Based on Income Replacement”.

Health Insurance

The Covid ‘19 pandemic has taught us that medical emergencies can ruin a family’s finances. An independent medical insurance cover in addition to that provided by the employer has saved tons of money of my clients who lost jobs due to the economic uncertainty arising out of Covid ‘19. Important points to consider while availing health insurance;

Waiting Period

Pre & Post hospitalization expenses

Cashless facility

Preventive check-up

Co-payment

Claim process & settlement ratio

Disability & Accidental Cover

Our income earning ability is dependent on our capacity to do certain activities. This insurance covers the risk arising out of accidents and disability that can cause damage to our income earning potential. A dance coach can suffer from loss of legs, a singer can loose voice due to an accident, a coder cannot code without hands and so on so forth. People who work in hazardous environments are more prone to injuries than others. Disability can severely impact your earning capability and affect your family’s day to day life.

Once you have taken care of insurance, the next tool of risk management is creating an Emergency Corpus. An emergency corpus ensures that you have adequate reserves to fund unexpected expenses or loss of income. It has been proved that people who have an emergency corpus have significantly lower stress in Life, than people who don’t have reserves. This has been more true in the current times of economic uncertainty filled with job losses.

Investments can be started once you have the above two in place. Doing this ensures that in times of uncertainty your investment portfolio is not touched or touched last. This ensures that your investment portfolio grows without disturbance or frequent shocks due to life events. Do note that proper risk profiling and asset allocation play an important part in creating an investment portfolio. So, adequate insurance first and investments next !!!

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