When people begin to invest money, they’re usually hungry for early results. They may approach investing with the conviction of a recent convert, saving and investing as much money as they can, even to the point of neglecting other needs, such as putting life insurance before investing. This is understandable, and quite natural, particularly if you are either young or relatively new to investing.
In spite of your enthusiasm, it is important to make sure that you have a few basics covered before you begin investing. One of those basics is life insurance.
You’re Not Ready To Invest Unless You’ve Covered The Contingencies
Investment advisers and financial planners commonly recommend that before you begin investing you should have a well-stocked emergency fund. That can include anywhere from 3 to 6 months of living expenses. The purpose of the fund is to make sure that you are protected from any income disruptions or large expenses that might force you to tap your investment portfolio ahead of schedule.
The fund enables you to carry on with the business of life, while keeping your investment portfolio protected from early withdrawals.
In essence, what an emergency fund does is cover a contingency – a temporary loss of income, or the unexpected arrival of a big expense or two. A life insurance policy functions similarly as a contingency plan. It creates a basic survival plan for your family or any other dependents that you have in the event of your death. This is a fundamental need, which means you should have adequate life insurance before investing.
Future Wealth Won’t Take Care Of Your Family If You Die Before You Get Rich
There is sometimes a thought that you don’t need life insurance, since your investment portfolio will eventually grow to the point where you will be effectively self-insured. This notion is especially popular among the young, since the prospect of their own death seems so remote.
The problem with this thinking is that it may be many years before you reach the point of being anything close to being self-insured through your investment portfolio. Let’s say that right now you have $10,000 to invest, but you fully expect it to grow to over $100,000 within the next 10 years. Maybe at that point you will be something close to self-insured, but what happens if something happens to you between now and then? What happens if you die when you only have $20,000 in investments?
Future wealth will not protect your family if something were to happen to you today. That’s the whole purpose of life insurance – as a contingency to take care of your family’s financial needs before you have the money that a large portfolio will provide.
The Cost-Benefit Of Life Insurance Is Much Higher Than An Equivalent Investment
One of the biggest advantages of life insurance is that you can quite literally buy six figures in coverage for just a few hundred dollars per year. This is especially true if you are in your 20s or early 30s. You may be able to buy $250,000 in life insurance for just a few hundred dollars per year.
If you are just starting out as an investor, it will take you many years – even decades – to accumulate that much money.
There may sometimes be the thought to keep your expenses as low as possible in order to maximize the amount of money that you have available to invest. If a large life insurance policy is only going to cost you $500 or $1,000 per year, it won’t be taking much away from your investment efforts.
And the benefit that you will have as a result of paying the relatively small premium will be enormous for your family.
Life Insurance Before Investing – Just In Case Your Investment Plans Don’t Quite Turn Out
It’s natural to be optimistic when it comes to investing. In fact, optimism is virtually essential to a new investor. But it is a sad fact that investment plans don’t always turn out the way we want them to, despite our best efforts.
Stock markets crash, individual investments blowup, and sometimes we need to tap investment portfolios early for unexpected reasons. The point is, investing is never a guarantee.
And just in case it doesn’t turn out as well as you hope, your life insurance policy can back you up with a plan to cover your family in the event of your death.
Life Insurance Should Be Seen As A Form Of Investment Diversification
You’re probably well acquainted with the idea of investment diversification. But not all diversification efforts are neatly contained within an individual portfolio. Some of the best forms of diversification you can have will be outside your portfolio. This can include an emergency fund, fixed income investments (like bank assets), and real estate.
But insurance can also be a form of diversification. As discussed above, it is a fail-safe against your death, at least until the time arrives that you have enough money saved and invested that you no longer need to maintain the policy.
If you can think of life insurance as a financial instrument that complements your investment portfolio, having it will seem more logical. And not having it can seem like an exercise in being penny wise, and pound foolish.
If you are an investor, especially a new one, do you have a credible life insurance policy – just in case? If not, then you need to make sure you pick up some life insurance before investing another cent!
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