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| Invest Vs Insure |
I think this debate has been going on for a long, long time. I have an extra $200 per month, should I invest it or use it for insurance premiums? There are obviously merits to both, saving money in any way possible is always better than wasting it. But, what's the best way to spend it?
If you're young, the best place to spend is insurance. I've written previous blogs and articles about the value of permanent insurance, and the savings component associated with it so I'll skip those details here. Insurance is critical when you're young for one very specific reason. Your biggest financial asset is your ability to earn an income over your life. Theoretically your income should increase as you become more of an expert in your field allowing you to have extra money for investments in the future, but you have to ask what if I don't get there.
What if I die prematurely, become sick, or disabled before then? These are three very unfortunate ways that cause your income to stop rather abruptly. If you die too soon then your family will not have access to your income. If you become permanently disabled then you still have expenses to look after as well as your families needs.
There's a reason why protection is the base of the financial planning pyramid. With out proper risk management plans in place our financial plans can come crashing down similar to a house with a poor foundation.
Investments are great. I think that they always pay off in the long-term; however insurance always pays off in any term.
Think about putting $150 per month into a $500,000 insurance product. If you passed away in two years your beneficiary would receive $500,000. If you invested $150 per month and passed away in two years then your beneficiary would received around $3600 (more if the investments are up, less if they are down). It's also important to not that many permanent insurance products offer a savings component which allow you to save for the long-term while protecting your family.
The same argument can be made towards disability insurance. If you are putting $150 per month into a disability insurance plan with a monthly benefit of $5000 then you receive $5000 monthly until age 65 if you become disabled tomorrow. If you have an investment account worth $100,000 you will have to dip into it to pay your bills, and there's no guarantees that this money will last forever.
Insure your ability to earn an income first then invest the difference. This is a great path to follow towards long-term wealth.