Hedging your bets through life insurance

Early retirement is a dream for most of us. You can look at this statement as indicating that most of us would like to retire early, or if you take a more pessimistic point of view, that early retirement is unlikely to happen.

Arranging life insurance can perhaps be viewed as taking a more cautious and less optimistic view of life, as after all you are making regular payments in a bet that something bad will happen.

On the other hand, you are unlikely to get far with your early retirement investment if you always predict a positive outcome in the money markets, and so life insurance should rightly be viewed as a way of hedging your bets.

Life insurance in the event that your main bet falls through

Just as with the more sophisticated forms of stock market investment, you seek to hedge through ensuring losses are covered in the event that your main bet falls through.

Good hedging will mean that you look to invest just enough to protect you should the markets swing against you, without committing too many resources into a less likely – and less desirable - Plan B.

When considering life insurance products this is exactly the tactic that you should adopt.

In a nutshell, this means avoiding the folly of over insuring. Many insurance policies, from life to home, can run for decades. If like most people you have limited resources, regularly paying for excessive insurance cover can amount to a huge chunk of wasted cash over the course of a lifetime.

In many cases, apart from perhaps life insurance, the worst may never happen. This means that when you look to set the level of insurance cover, or sum insured, you need to consider your situation as carefully as when you sink your teeth into a big investment.

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The tactic of self-insuring can in general terms be risky, but contains a philosophy that can be helpful when you come to determine the level of insurance that you require. Put simply, the trade-off is between paying higher regular insurance premiums, and taking a more basic policy that covers and costs less, pocketing the difference.

Building up a fund to cover damage and repairs can take a while, which is why you probably still want a basic insurance policy to cover the worst of the worse case scenarios. However, many types of insurance policy, from auto to home, will attract a discount as you build up a no claims bonus.

This means that meeting the cost of minor repairs yourself can be the most cost effective option, even if you have paid out for an expensive comprehensive insurance package that covers pretty much every eventuality.

The obvious upside is that you may never need to claim, and thus gradually amass a nice rainy day fund.

What you then do to grow this fund is up to you, but is beyond the scope of this article, so I simply wish you the best of luck with your future investments, and a nice early retirement.

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