Investment Portfolio
Investment portfolios play a crucial role in an individual’s financial planning. The main goal of any investment portfolio is to achieve long-term financial stability and secure future financial goals. A well-diversified portfolio includes both equity and debt investments.
Equity investments offer higher growth potential but are usually more volatile compared to debt investments. Debt investments, on the other hand, provide a steadier stream of income through interest accruals or coupon payments but offer lower growth with lesser volatility.
Together and with a right proportion of them based on ones ability and need to take risk one can set a portfolio and maintain as outlined in these insights on Portfolio Maintenance to keep the financial goals within reach.
Insurance
However, investment portfolios alone may not be enough to cover potential life risks that can impact an individual’s financial stability. There are a number of life events which can happen at any point in time such as illness, injury, accidents, health issues, disability, critical illness. The ultimate life event which can happen is also death.
Individuals and families need to plan for prepare for these unpleasant events as well along with their standard financial goals. The events are somewhat unexpected at individual level particularly with respect to time and suddenness with which they may occur. We need some instrument where this risk is transferred or borne by other parties.
The process of transferring any risk to a third party for a fee is hedging. And insurance is a key hedging that can be effectively used for the above events. Insurance helps in mitigating the impact of these life risks and ensures that an individual’s responsibilities are taken care of despite the events happening. In a typical financial portfolio, insurance plays an important role in protecting against these unfortunate and untimely life events. These events can have a significant impact on a person’s financial well-being and also emotionally draining. So it is important to have a plan in place to minimize the impact before the event.
And that way to manage these risks is through hedging, which is the transfer of risk from the individual to an insurance company. This is done by paying a premium to the insurance company in exchange for protection against a specific event. For example, having car insurance protects an individual from having to pay for the expenses of a car accident out of their own pocket.
Here’s a more detailed explanation of the role of insurance in a typical financial portfolio.
Insurance as Risk Management
- Insurance is a tool that helps in transferring risk from the individual to the insurer.
- It protects the individual from financial losses due to a potential high-impact event, such as hospitalization, disability, critical illness or death.
- By paying a small premium regularly (annually for instance), the individual is protected from a potential high financial impact, which can be life-altering.
- Insurance is a form of hedging that helps minimize the impact of low-probability, high-impact events and individual is covered from debilitating financial impacts.
Types of Insurance
- Health Insurance:
- Health insurance is usually provided by an individual’s employer and can also be purchased as an individual policy.
- It covers the cost of hospitalization and other catastrophic health events.
- Personal Accident Insurance:
- Personal accident insurance covers financial losses due to accidents.
- Term Life Insurance:
- Term life insurance covers the cost of death, providing financial support to an individual’s family in case the breadwinner is no longer present.
- Critical Illness Cover:
- Critical illness cover covers the cost of treatment in case of a critical illness, but not death.
- Disability Insurance:
- Disability insurance covers financial losses in case of a disability.
Importance of Insurance
- Insurance and investment should be seen as two complementary components of a financial portfolio.
- Investments provide for normal financial scenarios and growth, while insurance provides protection against low-probability, high-impact events and protect investor from its debilitating financial impact.
- A well-planned insurance portfolio along with a well-diversified investment portfolio can ensure financial stability and secure future financial goals.
Choosing Right Insurance
- It is important to choose the right insurance policies based on individual needs and circumstances.
- Each type of insurance policy should be carefully understood and evaluated based on the individual’s specific requirements.
- All relevant declarations in terms of health status and other data pertinent to the insurance be done diligently so claim is later not rejected
- Look for high repute insurer who has high claim settlement ratio so when event happens there is cover.
Summary
- Insurance and investment form an integral part of a financial portfolio, helping individuals achieve their long-term financial goals.
- While investments provide growth and financial stability in normal scenarios, insurance helps mitigate the impact of low-probability, high-impact events.
- By carefully selecting the right insurance policies, individuals can ensure their financial wellbeing and secure their future financial goals.
