Should you invest first or buy a term plan?

Keywords: term life insurance plan, one time investment plan

The moment we start to earn, our elders and seniors in the office start to give us advice regarding what should be a financial plan for the year. Collectively, most of the seniors advise us to get their insurance and investment plans sorted. There are various reasons why you should begin investing and purchase a term life insurance plan at an early age. However, when we initially start our careers, not many of us get started earning with 6-figure salary. Considering, we will have too many responsibilities, we sometimes face the problem of whether to invest or insure first. In this article, we will understand this scenario to help you make the decision. 

Here are three reasons why you should begin investing early.

Starting your investments early improves spending patterns

: When we first start to earn, our monthly income is not that high. And if we want to save from that limited income, we must limit our expenses by setting a budget. Over time, this basic exercise becomes a habit, ultimately improving our spending patterns. To develop the easy habit of saving/investing, set aside a portion of your salary at the beginning of each month. Next, use the remaining funds to create a monthly budget. Say you earn Rs 30,000 per month and wish to save Rs 10,000 each month. So, as soon as you receive your income, save Rs 10,000, and then create a monthly budget with the remaining Rs 20,000 and you can use that 10,000 in that one time investment plan. 

You reap the benefit of compounding

: Starting your investments early allows you to stay involved for longer periods of time which will help you get the benefit of compounding. Let’s illustrate this with two easy examples, say you wish to save Rs 5 crore for retirement. Now, with that aim in mind, you begin investing either in one time investment plan or in equities mutual funds at the age of 22. For this, you will need to contribute Rs 5,500 every year for the next 38 years, totalling Rs 25 lakh. In the second example, the goal remains unchanged, but you begin investing in one time investment plan or in equity much later, say at 45. For this, you would need to invest Rs 1 lakh per month for the next 15 years, totalling Rs 1.8 crore. This is how compounding benefits you over time.

A longer investment period allows your investment amount can be lowe

r: Continuing on from the previous point, given the benefit of compounding, you’ll need to invest considerably less if you stay involved for a longer period of time in a one time investment plan. In the previous point, we used two instances in which the objective amount remains constant but the investor begins the investment at two distinct times. In the first scenario, s/he begins investing at age 22 and continues for 38 years. Their monthly investments over the years were barely Rs 5,500, with a total investment of Rs 25 lakh. Now, by delaying the investing process and starting at 45, their monthly contribution amount would be Rs 1 lakh, with a total commitment of Rs 1.8 crore over 15 years.

The overall investment amount in the second example is significantly more than in the first.

Now that we have discussed the reasons why one should begin investing early, let us consider why it is equally necessary to obtain a term life insurance plan at a young age.

When it comes to term or health insurance, everyone, regardless of age, should have it. Sickness or health problems can strike at any time, and if you don’t have health insurance, medical bills can burn a hole in your purse. So, never put off acquiring a health or term life insurance plan. However, we frequently prolong the process of purchasing term life insurance for very simple but silly reasons. Most people believe that because we are young and healthy, we do not require term life insurance. However, contrary to popular assumption, purchasing term insurance early on is usually beneficial.

Here are three reasons why you should purchase term life insurance early.

The premium amount will be low if you are young and a non-smoker

: The most significant advantage of purchasing a term life insurance plan early on is that the premium amount is substantially lower than what you would pay if you purchased it later in life. For example, suppose you wish to buy a Rs 1 crore policy that covers you for 75 years. If you buy it at 25, the annual premium will be Rs 8,000. At 30, it would be Rs10,000. At 45, the premium for the same policy would be Rs. 30,000.

The premium remains the same throughout, so you pay less in total:

A term life insurance plan premium remains constant throughout its duration. As a result, if you purchase it at an early age, the premium will remain low throughout. In addition, you would pay significantly less overall. Assume you have a Rs 1 crore term insurance policy at the age of 25 that will cover you until the age of 75, for which you pay an annual premium of Rs 8,000. So you’d pay a total of Rs 4 lakh. However, if you purchase the same insurance at the age of 35, the premium will be Rs 15,000 each year. So the total sum you must pay over the years is Rs 6 lakh.

Your family gets insured early on

: The sooner you acquire a term life insurance plan, the sooner your family will be covered. Even if you are not married, your parents may rely on you, or you may have a debt (car loan, college loan), and if you die prematurely, your family will shoulder the cost. Having a term life insurance plan assures that your family will not face financial difficulties if something happens to you.

So, whether to invest or insure first?

So this is normally a chicken and egg dilemma – who came first? To put it another way, which comes first: buying insurance or starting to invest? The wisest course of action now is to do both things at the same time.

For example, say Rahul is 25 years old and has a monthly income of Rs 40,000. S/he can withdraw Rs 10,000 each month, or Rs 1.2 lakh yearly, for savings/investments/insurance. So, what should he do?

In today’s uncertain world, it is critical to protect yourself against all potential financial risks, which benefits both individuals and their dependents. Simultaneously, with inflation on the rise, it is important for individuals to begin their investment path as soon as possible. This is when the question of whether to insure or invest first arises.

Given that the right insurance plans protect you against potential financial losses resulting from unusual developments, it is critical to ensure first. A term insurance policy guarantees a large sum of money in exchange for a small annual premium. It provides you with even more reasons to get insurance before investing.

So we are saying,

Finally, insurance and investment are crucial components of any financial plan. You must make sure to protect yourself and your family before you begin investing. However, you shouldn’t delay your investments because inflation will eat away at your money, and investing is the best method to achieve your financial goals.