The world we live in right now is geared towards the accumulation of wealth, in preparation for a comfortable (some might say luxurious) future. However, Filipinos have different ways of saving up for a rainy day, since they define financial stability depending on their own circumstances.
Some are fine with just being able to pay all of their outstanding debts, retiring with a sufficient pension to cover for their daily needs. Others prefer retiring at a younger age, having invested their savings in stocks and acquiring assets in the process.
Whatever the reasons are, financial advisors and consultants agree on the importance of saving for the future.
Being both financial products, they might be used interchangeably, but they function differently
In this light, Philkotse.com aims to provide a concise yet clear comparison between savings and insurance. Being both financial products, they might be used interchangeably, but they function differently.
Savings refers to money that you set aside, whether in a bank, cooperative, or similar financial institution that provides depository services. This money is not for immediate spending but is being reserved for some future time.
Having savings is ideal for people who want to delay (or avert) an impulse purchase in favor of long-term needs.
Savings refers to money that you set aside that provides depository services
A financial institution safeguards a principal amount that a client deposits, putting the money in a savings account under the depositor's name and ensuring that the amount is kept safely to be withdrawn for some future contingency.
Funds held in a savings account earn interest over time, with the financial institution securing them "borrowing" the funds, putting them in various investments to make them grow.
Merely keeping funds inside a piggy bank does not increase their value
On the other hand, insurance guarantees monetary compensation in the event of damage or loss. This is represented by a contract between two parties called an insurance policy. There are two major types of insurance that the public can avail of.
One is life insurance that guarantees payment or reimbursement to the designated beneficiaries upon the death or disablement of the insured. The other is non-life insurance, which is used in the protection of assets, such as homes and cars.
It is a contract which a person or a business receives financial compensation or reimbursement
Insurance can be of great help when the unexpected occurs and when your finances on hand won’t be able to cover for the losses. These can range from medical emergencies resulting in disability or death, car theft or costly car repairs, and damage to your home caused by fire or natural calamities.
Insurance can be of great help when unexpected catastrophes occur
Now that we have an overview of what both financial products are, let's discuss the differences between them.
Although it's relatively easier to open a savings account with your preferred bank, it only puts a 0.2 to 1.25% interest rate annually. On the other hand, insurance earns more in terms of interest, especially in the case of investment-linked insurance plans.
A savings account only offers safekeeping and control when it comes to current cash flows. It may dissuade you from another episode of impulse buying, but not much else. If something were to happen to result in your death, your beneficiaries stand to get the money in your savings account.
In contrast, insurance offers a wider range in terms of compensation for events such as hospitalization, dismemberment resulting in disability, and damage repair. In many cases, insurance can even temporarily augment lost income.
A savings account only offers safekeeping and control when it comes to current cash flows
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An insurance policy is bought for a specific purpose; you can purchase life insurance to secure your well-being, property insurance for your home or auto insurance for your car. A savings account is more general in scope. This could be what makes some people choose to put all of their money in a savings account rather than invest in insurance.
In the past, a number of insurance schemes went awry, making people think twice about investing in an insurance policy today. This was why the Insurance Commission (IC) was established, serving as the foremost regulatory body ensuring that the public makes informed choices when making insurance decisions.
For others, they prefer depositing their money in an established bank, being able to withdraw them anytime they wish and not have to worry about paying regular premiums.
An insurance policy is bought for a specific purpose
An asset is said to be liquid if it can readily be converted into cash. If you want a liquid option, savings account are advantageous for your needs. Insurance companies won’t pay or reimburse your expenses in an instant. It usually happens under certain conditions and criteria.
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In the Philippines, agencies such as the Social Security System (SSS) or Government Security Insurance System (GSIS) protect their members by using contributions made from their salaries to guarantee benefits for them and their beneficiaries.
For many people, this is a more feasible option than purchasing additional insurance that is costly. Aside from the guaranteed pension and benefits as mandated by the law, they can also safeguard their money through savings accounts.
You can purchase insurance only for your home, or security for your car
In conclusion, insurance and saving accounts are financial tools that serve as a means of financial security. If you are going for liquidity, flexibility, and control, the various savings accounts offered by different banks and financial institutions might be more to your liking.
But if you want to protect your future and are willing to pay a recurring premium in exchange for protection from the unexpected, then insurance is what you need. You can even choose to get both, depending on your means and needs.