Kunal has just taken up his first job with an investment bank. His income is more than adequate to take care of his requirements. He has been seeing a cumulative balance in his account at the end of every month and feels that he is now ready to put it to some good use. He wants to start accumulating funds which can be used as the need arises. He is also considering a life insurance policy for protection. Kunal wonders if he has given sufficient thought to all aspects of his financial situation before starting his investment journey.
Kunal is doing the right thing by considering investments this early in his career. However, before committing to an investment plan, he must secure his income and savings against emergencies that may derail his financial stability. There may be situations, such as a medical emergency or an accident which requires a large sum of money that Kunal may not be able to manage in his current financial position. Or there may be circumstances that may affect his ability to earn an income itself. In such a situation, he may not be able to meet his expenses, let alone make investments.
Insurance is a way for Kunal to make provisions to face such eventualities. Life (term) insurance is necessary for him at this stage only if he has dependents 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. A comprehensive motor insurance policy will cover any loss to property or life suffered by Kunal 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 him deal with any unexpected money situation that he may face.
These are situations that may even push him into debt and will have long-term financial consequences, if not planned for. Kunal 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 the income.
(Content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.)