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Investment funds and life insurance: Why you need both

17 April 2023

5-minute read

Plan Well Feature Save and invest

Life insurance and investment funds can support your long-term financial goals. (Credit: Getty Images)

Financial planning with life insurance and investment funds is an excellent way to secure your, and your loved ones', futures

While investing brings risks, it is a valuable financial strategy to grow wealth and create another source of income. On the other hand, life insurance protects your loved ones against unforeseen events that may affect their financial security.

To further understand why you need both, let's define how these products can serve your financial goals.

How life insurance protects you

Insurance can be considered an asset and has a key role in a diversified portfolio. (Credit: Getty Images)

Life insurance plans are designed to provide you or your loved ones with financial security in a time of need.

Some people consider taking out life insurance as an inheritance for their loved ones. If you plan to do the same, ask your financial advisor if life insurance proceeds are subject to estate tax in your jurisdiction. The law differs from country to country on the applicable estate tax whenever assets, from property to financial instruments, are transferred to beneficiaries.

A policy can be a term or permanent life insurance. Term life insurance offers coverage for a fixed period (between 10 and 30 years) at lower premiums than life insurance. Permanent life insurance provides lifetime coverage with higher but fixed premiums.

Permanent life insurance can be considered a financial asset since a typical plan can accumulate cash value over time. Think of it as a savings or investment account within a life insurance policy. The earlier you purchase a policy, the more returns it can bring.

The two types of permanent life insurance are whole life and universal life. The former has cash value growing based on a guaranteed fixed interest rate. The latter provides different options for how its cash value will increase.

Depending on your plan's terms and conditions, you can withdraw cash value from your permanent life insurance and use it in several ways. For example, you can use it to make up for missed payments to keep your policy active or cover expenses in times of pressing needs.

In addition to growth in cash value, some policies offer tax-deferred benefits, allowing you to build savings while reducing your tax exposure.

Investment funds

Your readiness to invest depends on how much risk you can afford or handle potential losses. (Credit: Shutterstock)

Investment funds are financial vehicles that pool investors' money to invest in a diversified portfolio of stocks, bonds or other securities. Exchange-traded funds, mutual funds, index funds and real estate investment trusts are examples of investment funds.

Financial experts see investment funds as a conservative way to dip your toes in investing. They are also an inexpensive way to diversify your portfolio.

Investing in funds spreads your capital into multiple securities and assets. By not putting all your eggs in one basket, you reduce the overall risk of investing.

You can withdraw money from your investment funds. However, funds come with varying levels of liquidity. Consult a financial advisor about a withdrawal plan for your planned investment fund.

Insurance or investment first?

The ideal scenario in financial planning is setting aside money for both insurance and investments. But your economic circumstances and life goals ultimately inform your financial priorities.

Budgeting for coverage like health insurance makes sense when you have just begun earning an income. Health insurance provides access to medical care without you having to worry about how to cover the cost. Life insurance can rank high in your needs list as a parent or a household breadwinner. It provides income for your loved ones if you can't work anymore.

You can use your insurance asset whenever you're faced with sudden financial hardships. It's a safety net you can access now. Investing is your income booster, a way to attain your future financial security.

Investing early can earn you a higher return than keeping your money in a savings account. It allows you to bring in money on the side without the kind of effort and time you put into your day job. You can also potentially build a larger nest egg over time.

While this source of passive income involves risk, as the value of your assets can fluctuate over time, the power of compound interest works in your favour over the long term. You supplement your savings and fund your retirement lifestyle.

Together, life insurance and investment funds can help you achieve financial freedom, ensuring the flow of income continues into the future. It may be helpful to work with a financial planner to help determine your money strategy and risk tolerance.

If you're ready to learn more about the advantages of life insurance and investment funds, check out AIA Life Protection. You can gain peace of mind from the unpredictable while growing your savings, thanks to a stable cash value that accumulates over time.

You can achieve financial independence with a solid money management foundation. Watch as finance experts Anna Haotanto and Lachlan Campbell of the AIA Voices community share tips you can do today to achieve financial wellness in the future.

AIA Voices is a community of influential and educational voices from around Asia to talk about life, health and wellness. A platform to educate, motivate and inspire people to make positive behavioural changes on their health and wellness journey. Providing an opportunity for communities across Asia to connect, collaborate, and learn from each other. Designed to drive AIA One Billion, our ambition to engage a billion people to live Healthier, Longer, Better Lives by 2030.

References:

Healthy Living with AIA. 2022. Four reasons why you need life insurance now. [online] [Accessed on 27 October 2022]

Healthy Living with AIA. 2022. Insurance policies for women's health: Which one do you need? [online] [Accessed on 27 October 2022]

Financial Industry Regulatory Authority. 2022. Investment products. [online] [Accessed on 27 October 2022]

U.S. Securities and Exchange Commission. 2022. Mutual funds. [online] [Accessed on 27 October 2022]

Disclaimer:

This is general information only and is not intended as financial, medical, health, nutritional or other advice. You should obtain professional advice from a financial adviser, or medical or health practitioner in relation to your own personal circumstances.