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Jul 04th
| The Difference Between Insurance And Investment |
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| Written by Botswana Gazette online | |||
| Tuesday, 28 October 2008 17:00 | |||
 As an independent financial adviser I regularly encounter people who know that they need to ensure their family’s financial well-being but are confused about the type of insurance and investment products on the market. One of the main areas of confusion is about the difference between insurance and investment.Simply put, insurance is there to protect what you already have. Investment is sowing in order to reap the rewards, or dividends. For example, you insure your house contents so that in the event of a burglary or a fire, you are able to replace your lost property. You insure your car so that you can replace it in the event of an accident or theft. Life insurance is essentially no different. You insure your life so that in the event of death, your dependents are protected against the loss of your salary. Therefore, it can be argued that if you have no children or other dependents, life insurance is unnecessary. Saving and investing in your future however is always necessary. People invest money for a variety of reasons. It may be that you are planning to send your children to expensive schools or universities. It may be that you have money that you wish to grow at the best possible rate of return or it may be simply that you need to provide an income for yourself in your ‘twilight years’ when you can no longer work for a living. If you choose a policy, which is a combined life insurance and investment one, part of your premiums are being used to pay your dependents a fixed figure in the event of your death and part of your premiums are being used for you to save for your future financial expenses. Clearly if you have no dependents or you have dependents and have covered your life insurance needs elsewhere, then it is not the right policy for you. With a pure investment policy all your contributions are being invested to ensure maximum growth and perhaps protected against adverse fluctuations in the market. However, there is an overwhelming choice of products on the market and my advice would always be to see an independent, unbiased financial adviser before choosing any financial product. The adviser should assess your individual situation, understand what your goals and ambitions are, and help you to choose a financial product which is right for you. I do see a lot of people who are paying money into policies which they have little understanding of. For example, you need to know what would happen if you lost your job and are unable to continue your monthly contributions. Very few of us have a job for life anymore. Regular investment policies vary from ones which have a short commitment period of one to two years, to ones which commit you and penalise you severely in the event of you having to stop making contributions. Some policies include automatic annual premium increases of up to 10 percent, which means that if you are paying in P2,000 per month in the first year and P2,200 in year two this will have more than doubled to P4,287 per month by year eight and quadrupled to P8,354 per month by year 15. You should take care to consider whether you will definitely be able to afford a monthly commitment of that magnitude in the future. Other policies have no automatic premium increases built in and simply allow you to increase your premiums whenever it is appropriate and comfortable to do so – i.e. when your income increases. Some policies allow you to choose your level of risk and return and some do not. Some are clear and transparent regarding exactly where the money is being invested and some are not. There are many considerations to be weighed up before committing to any particular product, but the most important thing is to understand the financial vehicle that you own. If you are worried about your financial planning arrangements in any way, the qualified independent advisers at Southern Cross International are available for free consultations at any time. Simply call us on 3180111 or visit our offices, upstairs at Molapo Crossing on the Western Bypass.
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| Last Updated on Wednesday, 05 November 2008 16:32 |
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