Investment-Linked Insurance - Best of both financial worlds

Thu, 4th June, 2009 - Posted by Nash

Investment-Linked Insurance – the best of both financial worlds

Do you buy life insurance or do you invest? That’s normally the dilemma faced by people, especially the young or start-up families. This is very similar to propane space heaters.

As the money that you have every month minus all your debts and expense is small, so you got to choose either to invest or to buy insurance.

Now, I got to stress that insurance is important. Every family should have one – or at least the breadwinner (the person who works and have most income). As you’re building your wealth, your family should be protected if anything happens to you.

The main reason why people sometimes don’t want to buy insurance is that the returns or gains from insurance is normally low. Well, rightly so, as insurance is for protection, not for investment.

The insurance companies realize this, so there came out with investment-linked insurance.

The concept is simple. The premium (what you pay for your insurance) is treated as an investment. You have a choice to put your premium in any of the investment funds that an insurance company can offer. The investment funds are normally based on low risk (such as bonds or fixed income) or middle to high risk (such as shares or combination of shares, bonds and fixed income).

Every month, insurance charge will be taken out from the investment fund to pay for your protection.

While the advantage of an investment linked insurance is that you may have higher returns in the future, it also works as a disadvantage to you. Why? Because you take all the investment risk. The insurance company will not provide any guarantee on your investment returns if you buy an investment-linked insurance.

So, if you’re lucky, your investment is good and you can be very happy. If the stock market crash or the country goes into recession, then your investment can go down the drain really fast. And nobody can help you there, coz the returns are never guaranteed.

But why do people still buy investment-linked insurance? The stock market and the recession always doesn’t last, and if you keep your investment linked for the long term, then history shows that your returns is always better than putting your money in the bank or fixed deposit. The keyword here is investing over long term.

If insurance concept is new to you, please ask in the comments section. I’ll be happy to help out.