Post by oldman on Oct 19, 2013 7:17:55 GMT 7
Your First Million, 2nd Edition
Chapter 7 - Money & Life
Recently, I was having a long discussion with my insurance agent as I wanted to sort out my insurance policies given that I had retired early. Interestingly, when one takes up an insurance policy, this may be the last thing on your mind at that time but the reality is that most insurance plans assume that one will be continuing these policies until one reaches at least 60 years of age (by that time, some of the insurance policies may have sufficient cash value to pay for itself). Hence, ironically, if one can retire earlier in life, one still needs to set aside a monthly amount to pay for these insurance premiums.
My insurance agent then tried to reassure me that the premiums that I pay are a form of investment. Guess this is where my thinking differs significantly from his. It is true that this argument will win over most clients but not me.
To me, an investment is an asset that one buys with the primary purpose of selling it later at a higher price. If one sells it later at a lower price, this cannot be deemed an investment. If one does not intend or cannot sell it during one’s lifespan, this too should not be deemed an investment. Hence, if one buys a car, he is unlikely to be able to sell this at a higher price. Hence, the purchase of a car should be viewed as an expense rather thanan investment. Also, if one buys a house with the sole purpose of living in it till one expires, this too should not be deemed an investment for oneself.
With insurance, it is unlikely that we can sell it at a higher price given that we have to give commissions to the insurance agent as well as to the insurance company. The other issue with an insurance is that it is unlikely that we will be selling these or cashing these in … until we are dead (unless one redeems the cash value part of the policy before one expires). Hence, in our lifetime, we are unlikely to be selling these. If we do not sell these, we will not see any returns. As such, I do not treat insurance policies as investments.
Rather, I look at these as expenses. Of course, the other way of seeing it is that this can still be considered an investment to one’s family, given that when one expires, the proceeds will go to one’s family. But my point is that if one looks purely at himself, during our lifetime, we are unlikely to cash in our policies and hence, we are unlikely to see any money being returned to us during our lifetime. Hence, I do not see insurance premiums as investments; rather I see these as expenses.
In much the same way, the house that we are currently living in should not be seen as an investment as it is unlikely that we will be selling it. Even if we sell it, we are likely to upgrade to another house costing more. But when we expire, our children may then sell our house and keep the proceeds. Yes, our house then is an investment/ asset to our children.
You may then ask why this definition is so important to me. It is important because most of us do not think so hard when we can convince ourselves that certain purchases can be deemed investments. Hence, it is easier for the average person to buy a house rather than a car even though the house will cost several times more than the car. To him, the car is an expense and hence, he has to be very careful when spending the money to buy it. But in his mind, his house is an asset and an investment and hence, even though it costs more, it is easier for him to make the decision to buy.
It is for this reason that I do not view my primary residence as an investment and in the same line of thought, I do not view insurance premiums as investments. I deem both of them as expenses as your primary house is for you to enjoy and the insurance policy is to give you a peace of mind. They are both expenses to you and you should spend as much time evaluating these purchases, as you would any other expenses.
Chapter 7 - Money & Life
Recently, I was having a long discussion with my insurance agent as I wanted to sort out my insurance policies given that I had retired early. Interestingly, when one takes up an insurance policy, this may be the last thing on your mind at that time but the reality is that most insurance plans assume that one will be continuing these policies until one reaches at least 60 years of age (by that time, some of the insurance policies may have sufficient cash value to pay for itself). Hence, ironically, if one can retire earlier in life, one still needs to set aside a monthly amount to pay for these insurance premiums.
My insurance agent then tried to reassure me that the premiums that I pay are a form of investment. Guess this is where my thinking differs significantly from his. It is true that this argument will win over most clients but not me.
To me, an investment is an asset that one buys with the primary purpose of selling it later at a higher price. If one sells it later at a lower price, this cannot be deemed an investment. If one does not intend or cannot sell it during one’s lifespan, this too should not be deemed an investment. Hence, if one buys a car, he is unlikely to be able to sell this at a higher price. Hence, the purchase of a car should be viewed as an expense rather thanan investment. Also, if one buys a house with the sole purpose of living in it till one expires, this too should not be deemed an investment for oneself.
With insurance, it is unlikely that we can sell it at a higher price given that we have to give commissions to the insurance agent as well as to the insurance company. The other issue with an insurance is that it is unlikely that we will be selling these or cashing these in … until we are dead (unless one redeems the cash value part of the policy before one expires). Hence, in our lifetime, we are unlikely to be selling these. If we do not sell these, we will not see any returns. As such, I do not treat insurance policies as investments.
Rather, I look at these as expenses. Of course, the other way of seeing it is that this can still be considered an investment to one’s family, given that when one expires, the proceeds will go to one’s family. But my point is that if one looks purely at himself, during our lifetime, we are unlikely to cash in our policies and hence, we are unlikely to see any money being returned to us during our lifetime. Hence, I do not see insurance premiums as investments; rather I see these as expenses.
In much the same way, the house that we are currently living in should not be seen as an investment as it is unlikely that we will be selling it. Even if we sell it, we are likely to upgrade to another house costing more. But when we expire, our children may then sell our house and keep the proceeds. Yes, our house then is an investment/ asset to our children.
You may then ask why this definition is so important to me. It is important because most of us do not think so hard when we can convince ourselves that certain purchases can be deemed investments. Hence, it is easier for the average person to buy a house rather than a car even though the house will cost several times more than the car. To him, the car is an expense and hence, he has to be very careful when spending the money to buy it. But in his mind, his house is an asset and an investment and hence, even though it costs more, it is easier for him to make the decision to buy.
It is for this reason that I do not view my primary residence as an investment and in the same line of thought, I do not view insurance premiums as investments. I deem both of them as expenses as your primary house is for you to enjoy and the insurance policy is to give you a peace of mind. They are both expenses to you and you should spend as much time evaluating these purchases, as you would any other expenses.