Yesterday I wrote about whole life and term life and why I think whole life is good and how I have started appreciating the benefits of whole life as I have aged.
One of the argument which I used to hear against endowment plans and whole life plans was that you could take the same life cover at a much lower value by taking a term plan and the difference can be invested in a mutual fund which will give a much higher return.
There are a few challenges that I have been able to figure out in this logic. If you know of others please let me know in the comments below.
1. With term insurance you don’t get any money if you survive the term, that’s a complete loss.
2. Mutual fund or stock market returns are not guaranteed. In the endowment policy you are guaranteed a minimum value at the end of the term. You may get a higher sum because of bonuses, but a certain minimum is assured.
3. When you sell your stock the amount attracts long term capital gains tax. The money you get from the insurance policy is generally tax free in quite a few countries both for you and after your death for your survivors
4. In most countries investing in mutual funds or stocks does not get you a tax rebate while investing in insurance does.
If you don’t have the financial capability to take an endowment or whole life plan, take a term plan. Take it as early as possible and take it for the highest value feasible. Getting the highest coverage on your life is absolutely necessary. Don’t ever think that Mutual Funds can cover that risk.
However once you have some lee way in your finances, start whole life and endowment plans to create predetermined cashflows.
Use mutual funds or stocks to give you growth in the very long term where the compounding kicks in.
This has been a learning for me and I would not like you to make the same mistakes that I did.
Till next time then.
There’s so much of bad mouthing on insurance of any kind. I have consistently maintained that you should be adequately covered.
The situation is so bad that even my insurance advisor was suggesting me a term plan when I was evaluating a whole life policy.
In my opinion, term policies are a low value method to cover risk and should be used as a primary method of insurance, especially when you are very young and starting on your life journey.
On the other hand whole life policies not only give you tax free returns while you’re alive – in India at least – they also ensure that your family gets a good coverage. In addition on these policies you can take a loan at much lower interest rates. A term policy will not allow these benefits.
So you’re getting a tax break for investing in insurance, you get a tax free amount after a certain period, your family is also protected and you can also take low interest rate loans.
The biggest thing is that you are ensuring that you are adequately mitigating risk and also ensuring predictable cashflow in the future.
When I was young I used to think of the insurance amount as a burden, but as I have grown older, I have realized its value more and more.
Till next time then.
FEAR is generally caused by the unknown. What you are not sure off causes you to be uncertain. When you are uncertain you get fearful about the outcome.
Earlier I always used to talk about how investments would lead you to have the confidence to take the risks of life without being fearful .
However I have recently started analysing different kinds of risks that I face – so as we grow older, medical costs is a big issue. Next I have only one house in which I presently live – so there’s always the risk of a catastrophe that can hit.
I actually listed at least 5 or 6 different things which are high risks, that can suddenly wipe out my savings and investments.
Based on the ideas given by Garrett Gunderson, in his book Killing Sacred Cows, I have gone about figuring out if there’s insurance available to me to cover each of those risks.
While I knew about health insurance, I didn’t know about the concept of top-up that can add a quantum leap in your coverage at a very small premium. The caveat is that you should have the base medical insurance in place. Since I identified the risk and put a value to it, I was able to identify a product which would give me coverage to that risk.
Once you can list out all your risks and start putting a monetary value to them, chances are that you may also get a company who will be willing to cover the risk for you at a price. Once you have covered the monetary value of the possible risk, then its no longer a risk.
Insurance is a different kind of leverage, you are covering a large monetary risk by paying a small premium.
Once there is no risk, the fear reduces. Once fear reduces, you get the confidence to look at bigger things and aim for them. Insurance helps you get that confidence.
Till next time then.
I read an extremely interesting concept today. I have considerably got convinced about the idea, still digesting a few things, but thought of sharing to see what you think.
I have always been aware of insurance being necessary. As a matter of fact in my posts on advice to young women, I had layed great stress on both health and life insurance.
Quite frankly given the high inflation in healthcare costs, I would anyway recommend you to take the highest possible health insurance. On life insurance however I was generally of the view that you should take term insurance to cover the major risks that you envisage.
One of the key things in financial independence that I keep harping about is the ability to take decisions without the fear of having a job in the future.
One of the reasons that financial independence becomes a moving target is because as you grow in life, your finances improve, you get used to a better lifestyle. To be able to achieve that lifestyle if you leave your job, you need to have a much higher level of assets. So you again start saving and investing for the next higher level but by then your target amount has moved further.
This happens primarily because FEAR, the What if eventuality.
This is where if you have more than adequate insurance of different types, you transfer the risk to the insurance company and your fear can reduce. This is where I have to delve deeper on how you can leverage this ideato become more fearless.
I will keep you posted as I delve deeper into this subject.
Till next time then.