Insurance or Investment? Which one I should choose?
There are many misconceptions about insurance and investment. This is especially true for those with no experience or adequate knowledge about insurance and investment.
Insurance is used mainly for protection for risk events. Risk events refer to death, permanent disability, critical illnesses. With small amount of premium, the clients or the clients’ family members can get a large sum of money (sum assured) when risk events happen. When the risk events happen, the clients mostly will lose the ability to earn more money (income loss). Hence, insurance payout is very useful during the occurrence of risk events. It uses the concept of using small money to get big money. Generally, nobody will want the events to happen which it has lesser possibility to happen (less than 10% generally for early occurrence). However, no one can predict what will happen in the future. Insurance is used to transfer this huge income loss risk to insurers at small charges. INSURANCE IS A COST.
Investment is used for wealth creation. When one invests, the money is generally compounding at the range of 4% to double digit return. The wealth is created slowly through investment. The likelihood for clients to survive through 55 years old is high. When the age increases, the ability to work start to reduce. The need of the money will be imminent at that time. When one does not work, where the money is coming from? Definitely from the long term investment or saving. This is when investment comes handy for this situation. Wealth hardly accumulated through insurance policies because a lot of costs (insurance charges) are involved and with low return.
In conclusion, both insurance and investment are required. Insurance is for protection for risk events (low occurrence probability but high financial loss impact). It is necessary to transfer the risk to others at low premium. Investment are required for early or on time retirement (high occurrence probability but medium financial impact). One cannot retire early or on time if there is no investment in place. The early one invests, the bigger amount one accumulates (assuming invest the same amount of amount every month). The later one invests, the larger the investment amount required for on time retirement. Else, one would need to continue working to sustain his life.
The money generated through investment is not as fast as insurance. So, if the risk event happens suddenly, no huge sum is available to cater for the family needs for investment. Investment also involves risk which the return is not guaranteed. Hence, portfolio is recommended for investment.
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