Is insurance a good investment?

One of the key elements of any good financial plan is to have a set of goals mapped out, so that you can build a savings and investment strategy around them. They might include short term objectives, such as an overseas holiday or a new car, right up to longer term goals, such as buying a holiday home or funding retirement income.

Once you have firmed up your goals you can then decide what type of investment (or mix of investments) will best suit reaching each goal. This can include growth investments, such as property and shares, and fixed interest investments, such as cash accounts, bonds and term deposits.

While everyone’s goals and preference for their investment mix will be different, there is one factor that is common to all investment strategies, time. No matter whether your goal is short or long term and no matter how you choose to invest your money, you need the element of time to build up deposits and time for income and capital growth to occur. In the case of growth investments, you may also need time to ride out fluctuations in the market.

But what if the time factor is suddenly taken away?
Without time, even the most carefully planned investment strategy can be left in disarray. The greatest risk to your investment planning, therefore, does not come from the market or economic conditions, but rather the risk of a sudden event depriving you of the time you need to make deposits and earn returns. This is exactly what can happen if you were to die prematurely or be hit with a serious illness or injury. Being robbed of time through such events means that investment and lifestyle goals will need to be abandoned.

The only way to economically and effectively eliminate this risk is to have sufficient personal insurances to make up for the time that has been lost. Life insurance, total and permanent disability insurance, trauma cover and income protection can provide a ready source of lump sum payments or income benefits that can make your investment plans ‘self-completing’.

Insurance can be your best investment
Most people only consider insurance in terms of protecting the livelihood of their loved ones, but in the context of an investment strategy, your insurance plans are effectively like an investment in themselves. Like other investments, you could think of your insurance premiums as being just like making a regular savings or investment deposit. Of course there is the risk that you may never have to claim and never be able recoup your investment, but on the other hand if you ever do have to claim it could be the most profitable investment that you will ever make!

John and Mary: a case study
John and Mary were both 50 years old and both employed full time when they decided to meet with a financial planner to map out their run up to retirement. After discussions, the planner had helped them identify three key lifestyle goals:

  • Purchase of a $100,000 boat in five years’ time, so that they could indulge their passion for water sports.
  • Build an education fund for their two 8 year old twin grandchildren, so that they could give them $25,000 each for tertiary education when they finished high school in ten years’ time.
  • Supplement their employer super with a personal fund to accumulate an additional $150,000 by age 65.

Their financial planner mapped out a monthly deposit amount that they would need to allocate to their investment plan and a combination of investments that would suit each goal’s timeframe and take into account their risk profile.

They both had income protection plans in place, but no other forms of insurance for death or disability, based on the fact that they had no personal debts or mortgage and their children were no longer dependent. The financial planner recommended that they take out a combination of life insurance, TPD insurance and Trauma cover on both their lives for an amount of $300,000, which would be sufficient to enable them to fulfil all three of their goals instantly at any time over the next 15 years if misfortune struck.

Simply by allocating a small portion of their monthly investment amount toward the insurance premium, John and Mary had effectively future-proofed their investment plans and made their goals self-completing if the worst happened.

How important are your goals?
If you have specific lifestyle goals in mind for your future and you are determined not to compromise on achieving those goals, then it may be wise to consult a professional planner to assess how your insurance planning can underpin them.

What are your thoughts about the importance of owning insurance to underwrite your investment plans?