Insurance Vs. Savings – Which One to do First?

Many earning individuals confuse with regard to their finances. This is especially so in early stage of your career. You don’t understand what to do with your surplus-income. Many people are in dilemma, whether to start with a savings plan or to buy insurance. In such a case, this article will help you understand what to put on priority – savings, insurance or both?

We strongly believe that insurance is the best financial tool that helps cover financial needs of your family. This is because, in many cases, people have been left nothing when something happens to the main breadwinner (either disabled or sudden demise). You, therefore need to consider taking more insurance (Term insurance, medical insurance/accident insurance) in the initial earning years of your career.

Why is insurance considered first?
When you are young (at early stage of your career) your biggest asset is your future income. It is, therefore, important for you to have that insured. You need to be self-insured for health as well as life as, insurance helps you thus:

  • Pay your medical bills, in case of hospitalization for serious injury, illness or when you develop a medical condition.
  • Cover your family’s financial needs in case of any negative life events (you may meet accident – get hospitalized or sudden death).
  • If you are married, it takes care of cost of your kids’ education, family’s financial needs – either parents, siblings, wife/kids (in the event of your death).

Every member of family is dependent on you as you are the main breadwinner of the family. Your family runs the risk of financial hardship in the event of a casualty to you. So, it is you, who needs the insurance the most. The Rich are self-insured. They don’t need insurance. For better understanding, read our article Why poor not rich need insurance?

You should drive home the advice/fact that, insurance comes first and then savings.

Why savings to be done later?
Any negative event in life that can destroy all your savings at a shot. While you may start small savings per month, but it may not accumulate into anything substantial till you reach, say, 45. During this time any negative life event (accident, illness, etc) can take away all your savings. Insurance is, therefore, essential for this reason.

Once you accumulate substantial savings you become self-insured. Your savings take care of your family’s financial needs and insurance may no longer be required. Hence, as you get older you must concentrate on savings as you have less income generating years ahead of you. At this stage, your biggest asset, moves from being your future income to being your retirement savings.

Insurance Vs. Savings
Now, let us consider how insurance is better than savings at an early age. If you take insurance at a young age, you can purchase it by paying lower premium. You can, thus, continue with this range of premium amount for the next 30 years (in case of term insurance policy). Also, the premium paid at an early age will be almost half the same premium 10 years later. So, consider taking insurance in the manner as follows:

  • Take term insurance for a sum assured of Rs 20 lakh. The premium costs around Rs 300 per month for age group 20-30 years. It covers financial needs of your family in case of your death.
  • Take medical insurance for a sum assured of Rs 5 lakh. The premium costs around Rs 300 per month for age group 25-35 years. It pays all your medical bills in case of hospitalization for serious injury or illness.
  • Take accident insurance for a sum assured of Rs 10 lakh. It is the cheapest of among all the insurance products, where the amount of premium is as low as Rs 3 per day. It helps in case of accident or illness.

The sum assured in each is based on the income you earn. If you can afford more for the premium, you can take more sum assured.

Thus, low premiums at an early age can expect benefits. You need to put only around Rs 600 per month for insurance premiums. However, if you put the same amount elsewhere, the returns will not be more compared to insurance benefits.

For instance, if you put Rs 600 per month in savings, you might save up to Rs 7,200 per year. What happens if you are hospitalized? Is this amount sufficient for paying medical bills? When your hospital bill is Rs 1 lakh, your Rs 7,200 savings will not help.

Amount of insurance and savings – at different ages

Your insurance must be high at start of your career and low when you reach your retirement. Alternatively, your savings must be in an increasing manner. If you maintain both insurance and savings, shown in the above graph, you will maintain a better financial situation. It is a good long-term personal financial planning to lead a sensible life.

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