Build Your Financial Fortress: Why Separating Insurance and Investments is Key

 

A Simple Guide on Separating Insurance and Investments

Traditionally, Indian households emphasize saving for the future. When middle-income families have a child receiving their first paycheck, parents often encourage them to save for the future. In most cases, the first option that comes to mind is an insurance policy.

The trusted insurance agent, familiar with the family (and maybe even extended family), is invited home. The excited young earner, who might be looking forward to spending their well-deserved earnings on a long-desired purchase, is then guided towards contributing to the insurance company. This supposedly guarantees (or promises) a good financial sum after a long period say 25 or 30 years.

While this well-intentioned approach likely "forces" the youngster to save, a better-informed and more disciplined young person could benefit greatly by understanding the difference between investing and insurance.

Early in our careers, when my wife and I began earning, we followed suit and purchased insurance policies for our children's future. The annual premiums were significant, but the enticing proposal convinced us to commit.

Little did we know, a whole new universe awaited us. Within two years, we stumbled upon the world of financial planning. It was like opening a treasure chest filled with financial instruments! Some we recognized, some we'd heard whispers of, and many were completely new. This newfound knowledge opened doors to personal finance concepts like budgeting, saving, investing, and financial products like mutual funds, bonds, direct equity, ETF, etc.  As we delved deeper, the nuances of these concepts and products became clearer. I'll forever be thankful for this chance to enter this empowering world.

This was where we learnt that Insurance is like a safety net, guarding you against unexpected events that could otherwise throw your financial life into disarray. It comes in various forms, such as life insurance, health insurance, and property insurance. The primary purpose of insurance is to provide financial protection and peace of mind.

This was where we learnt that Investing is a strategic way to grow your wealth over time. Unlike insurance, investments are about creating a financial future for yourself and your loved ones.

We understood that the importance of keeping insurance and investments separate is a key step towards financial stability. 

 

Let's break this down into simple terms to make informed decisions about managing your money effectively.

Insurance – is for protecting your today.

Before diving into insurance, assess your needs: life insurance for dependents, health insurance for medical costs, and property insurance for your belongings. Then, consider the regular payments (premiums) to ensure they fit your budget. Finally, focus on pure insurance policies for clear coverage, avoiding products that mix insurance with investments.

Investments – are for building your tomorrow

Clearly define your investment goals, like a dream home or retirement. To minimize risk, diversify your portfolio across assets like stocks, bonds, and real estate. Remember, investment risk and your comfort level with it should go hand-in-hand for a well-rounded strategy.

Why Keep Them Separate:

Separating insurance and investments offers advantages in three areas: clarity (easier tracking of protection vs. growth), cost efficiency (potentially lower fees), and flexibility (independent adjustments to each based on your evolving needs).

Recognizing this key distinction transformed our financial strategy. We've never looked back.

The content made available in this article is for general informational purposes only. While every effort has been made to ensure the accuracy and completeness of the content, it should not be considered as a substitute for professional consultation.   

About the Author