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Insurance: Protection or Investment?

Insurance should be treated as a protection rather than an investment tool. Insurance provides instant cash to the dependants of the insured, to help minimize the impact of unforeseen circumstances. Therefore, insurance is very important in terms of protection as long as it is not overused.

After reviewing your insurance needs, buying term insurance might be more advisable for instant protection. The rationale behind this is that term insurance is able to provide greater protection at a lower cost. Yes, term policy does not carry any cash value, but ask yourself the following questions:

  1. With bonus cuts, how much cash value can a whole life or endowment policy generate upon maturity? Do you want to pay more premiums to get the same cash value as previously projected, or do you want to lower your cash value projection by paying the same amount of premiums? 
  2. If anything unfortunate happens to you now, is your coverage enough for your dependants to live on?
Therefore, generally speaking, immediate protection is more important than cash value upon maturity. Why bother to pay more and get less?

Past records show that equity and real estate investments provide better returns than any other investment tools. In fact, equity is more liquid than real estate.

When planning for retirement or children’s education, instead of buying an endowment plan, it is more practical to have enough term policy to cover your protection needs and then start equity investments such as unit trusts as soon as possible.

In other words:

  1. After a detailed review of your insurance needs, change to a term policy to get enough protection at a lower cost to save on premiums.
  2. Invest whatever you have saved on premiums into unit trusts or shares that will generate higher returns in the long term by practicing dollar cost averaging.
In summary, realistically set you objectives, and continuously educate yourself to have a better understanding of how each financial tool will help you to:

  1. Spend less but get better protection (insurance planning)
  2. Accumulate enough resources to cater to your financial needs (investment planning)
  3. Have better wealth preservation (tax planning); and
  4. Have effective wealth distribution (will/estate planning).
Of course, most importantly, bonus cuts by your insurer will then no longer be a concern to you.
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Insurance: Protection or Investment?
Insurance:  Protection or Investment?
Reviewed by Pisstol Aer
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