Should I prioritize insurance or investments?By Randell Tiongson on June 14th, 2016
Should I prioritize insurance or investments? Can’t I do both at the same time?
Those are questions I get asked a lot, and I understand why a few people may get confused. Whether you scour the web for personal finance resources or read books on how to handle and manage your money, there are different answers to the same questions. Other resources suggest doing both (insurance and investments) if you have a surplus of money. In my book, No Nonsense Personal Finance, insurance, which is step 4 in my 5-step ladder system, actually comes first before investments, which is step 5.
When to get insurance first?
I advocate getting insurance first over investments if you have people depending on you. Are you an OFW supporting a family back home? Are you the breadwinner of your family? If you are, then life insurance is vital for you. You are your own greatest asset, and if something unfortunate happens to you, what will happen to your dependents – your children, your spouse, your aging parents? Life insurance is there to give you and your dependents the peace of mind that if something happens to you (e.g. critical illness, disablement, etc.), that they will have the financial ability to face challenging times. Don’t take the risk and wait for something unfortunate to happen. Your monthly insurance payments are a small price to pay if you (for critical illness) or your dependents need to make a claim.
When to invest first?
As mentioned above, life insurance is for those with dependents. If your situation is the opposite (read: zero dependents), no one will benefit from your insurance policy. When you’re a fresh graduate still living in your parents’ house, how can you expect to support dependents when you cannot fully live independently? If this is the case, then you may opt not to apply for life insurance yet until you grow older and have dependents. Another option is to apply for term life insurance instead (versus permanent life insurance) which provides coverage for a certain time.
Can’t I do both?
Yes, you can do both. There are actually financial products which combine both insurance and investments. These are called VULs, or variable universal life insurance. With a VUL, you have both an insurance policy and investment account. This is perfect for those who do not trust themselves to maintain the discipline with investing. This is because if you invest outside of a VUL such as stocks or mutual funds, it’s up to you when you want to deposit more money into your investments. If you see yourself using a surplus of money to shop instead of invest, then VULs would be a better option for you. With a VUL policy, you are forced to make your monthly payments every month because you’re paying for both an insurance policy and your investments.
However, VULs are not for everyone, and it may be better to separate your investments from insurance. This is especially so if you have already built the habit to contribute to your investments and savings regularly. If you’re the type to save first before you spend, then you’re better off opening a separate investment account instead of a VUL policy. An alternative strategy that can work for you is BTID (Buy Term, Invest the Difference). You can buy a term policy which is cheaper than a VUL and invest the difference in a mutual fund ,UITF or stocks.
Buying a VUL or employing a BTID strategy will both work for you; it’s just an issue of preference.
No Nonsense Personal Finance
Insurance and investments are only 2 out of 5 aspects of my personal finance ladder system; however, all five aspects (learning to manage money, avoiding debt, saving, getting insurance, and investing) are interrelated. If you want to achieve financial freedom or become a winner when it comes to your personal finances, it’s important to learn and practice all five. You cannot invest and insure yourself if you cannot save a portion of your salary to pay the premium. In the same way, investments become futile if your debt is greater than your investments. What is important is you learn to balance the different aspects of personal finance. Before you know it, you won’t have to ask which you should prioritize first – insurance or investment – because the answer will come to you naturally.
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