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Buying Insurance & Investing

It’s true. We all have that one friend (or classmate, or family member) who is an insurance agent. Sometimes, they cajole us to purchase insurance products. In those times, it can be difficult to share personal financial details with them, and come up with polite rejections if we are not interested.

Still, most of us need insurance products to protect ourselves against the unexpected. In Singapore, there are generally two types of insurance policies that individuals typically purchase. One is a life insurance policy, which combines an insurance component with an investment component that allows the entire policy to provide a return to the policyholder over the long run. Another is known as a term insurance policy.

The similarity between a term insurance policy and a life insurance policy is that both provide death benefits and cover a wide range of critical illnesses and disabilities. The difference is that a term policy does not have an investment component (so there is no return associated with a term policy), and its insurance coverage is only for a fixed amount of time.

The most common reason I’ve heard for purchasing life insurance is that you get a return after a certain timeframe, and the insurance coverage is for life. But the thing is, life insurance costs substantially more than term insurance. Beyond the higher premiums you pay because there is the investment component which is managed by the insurer, you are also paying for sales commissions and other types of overhead costs.

I don’t know about you, but I prefer getting more bang for buck when I’m putting my money to work. So, when I’m buying insurance, I prefer to buy term insurance. To earn returns, I invest.

Today, there are a myriad of cheap and incredibly easy ways to invest in equities and bonds. For example, there are exchange-traded funds (ETFs) that give you exposure to many stocks in one fell swoop. ETFs are traded just like stocks on the stock exchange; for a list of ETFs available in Singapore’s market, head here. The best thing about this DIY approach is that your money stays with you. Unlike the investment component of a life insurance policy, you do not have to wait 10 to 15 years to cash out unless you’re willing to bear penalty charges.

Now, the premiums for term insurance generally tend to rise substantially as you age. But remember, you are paying far less today – the sums saved can be invested so that the magic of compound interest can work for you and not your insurer.

And if you don’t know where or how to start investing, this is where The Motley Fool Singapore can help.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.