What is more important in a financial plan: Insurance or investments?

Rishabh has just begun his career at a bank. He earns enough to take care of his household expenses. He also has a car, gifted to him by his parents on his graduation. Rishabh has surplus money in his bank account at the end of every month and wants to start investing. His idea is to accumulate a corpus that can be easily accessed if the need arises. He is considering starting an SIP in a mutual fund. However, his parents want him to buy a life insurance policy. Has Rishabh given sufficient thought to all aspects of his financial situation before deciding on his investment plan?

Rishabh is doing a good thing by considering investments early in his career. However, it is important for him to first secure his income and savings against the emergencies that may derail his financial stability before he commits to an investment plan. There may be situations, such as a medical emergency or an accident, which require a large sum of money that he may not be able to manage, given his current financial scenario. There may also be circumstances which might affect his ability to even earn. In such a situation, Rishabh may not be able to meet his expenses, let alone make investments.

Insurance will help him face such eventualities. Life insurance is necessary for him at this stage only if he has dependants who he supports with his income. More relevant would be insurance policies that help him deal with unexpected demands on his income.

A health insurance policy will cover him against steep medical bills while a comprehensive motor insurance policy will cover any loss to property or life suffered by Rishabh or other involved parties in a motor accident. A personal accident insurance will provide compensation in the event of temporary loss of income caused by accidents.

Together, these three policies will help Rishabh deal with any unexpected financial crisis that he might face. These are the situations that may even push him into debt and will have longterm financial consequences. Rishabh will do well to first incur the expense to protect himself. He can then consider investments with the confidence that there will be no disruption to his income.

(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)