life insurance

Life Insurance is a 4 Letter word…continued

cash flow, compounding, Insurance

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.

Carpe Diem!!!

Life Insurance is seen as a 4 letter word.

Insurance, Leverage

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.

Carpe Diem!!!