Let’s be clear, LIFE INSURANCE is not an Investment!
As a financial advisor based in Dubai, I fully believe that Life Insurance is a particularly important component of anyone’s Financial Plan, however it is not an investment product, and should never be considered one.
When you buy Life Insurance, you are purchasing protection for your family against unforeseen incidents that can adversely impact their financial well-being. Thus, life insurance is a risk mitigation strategy for the financial uncertainty of your family and your assets. Hence, you are a buyer and not an investor. Though life insurance is sold as a savings or investment product, it is purely a financial protection product.
Also, it’s important to understand that “Term Insurance” is the only pure form of Insurance. It is the cheapest and easiest product that serves the purpose of protecting your financial interests in case of loss of life by paying an annual premium. In case of any fatality, your beneficiary receives the sum assured. However, if you outlive the policy period, no one receives anything. As simple as that. While that being the case, it is as mentioned before, the cheapest form of Life Insurance.
As for Whole of Life policies, you can receive part or whole of your premiums paid after a pre-determined period, but the money is worth much less when adjusted for inflation. Moreover, these policies have a much higher premium associated with it.
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So, it is safe to say that each of them has its own benefits or shortcomings. But one has to remember that either of these products can be right for you, based on your entire financial plan.
Thus, we’ve established that an insurance policy – be it a term plan or a whole life plan that remains critical to your financial planning. In fact it is one of the most reliable safety nets, and acts as an income replacement tool.
But it is definitely not an investment product. When you invest in your surplus funds, you aim for wealth creation and not just financial protection against the eventualities.
These returns are compensation for the various risks that your capital is exposed to, unless you are investing in low-risk, low-return assets like government bonds.
Also, your investment choices depend on a lot of factors like your goals, risk appetite, timeline, overall portfolio allocation as well as the desired returns. You also need to monitor your investments periodically to align them with your goals and take corrective measures when required.
This is not the case with insurance.
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Please look at Life Insurance as an income replacement or a guaranteed financial valuation of your life. It is a means to ensuring that in the end, you, your family or any of your loved ones, do not have to struggle financially in your absence.
If life was a motorcycle, life insurance is the helmet you buy along with it. It may not be the most exciting product you own, and definitely not a conversation starter at a party, but it is something you need to ensure that your financial interests never suffer.