Why we cannot consider Insurance as an investment

This article covers the difference between investment and insurance. It also talks about why we cannot consider Insurance as an investment.

What is Investment?

Investment means something in which you put your money and expect it to grow over time for respective financial goals. There are various types of asset classes or instruments such as Stocks, Mutual Funds, FDs, G-Certificates, Bonds that multiply your money.

What is Insurance?

Insurance is a contract, represented by a policy, in which an individual or entity receives financial protection or reimbursement against different types of losses from an insurance company. 

Insurance policies are used to get protection against the risk of financial losses, human losses, and other losses to the insured or her property or liability for damage or injury caused to a third party. It can also get bought for protection against unforeseeable events that can affect a family’s financial future.

Insurance companies charge you a premium (monthly/ yearly) to give you cover or protection against those unforeseeable events with some financial benefit. Benefits can be a sum assured for your family/ nominee in case of your death or as per conditions given in the policy depends on age, liabilities, health, addictions (such as smoking etc.).

Why we cannot consider Insurance as an investment

There is a very fine line between insurance and investments. The line gets crossed by many people due to a lack of adequate financial literacy & persuasion of advisors/ agents for higher commissions offered by insurance companies.

Insurance and investments have an important role in financial management. Both have different objectives and hence should not be considered as same.

Term insurance is a type of life insurance that provides coverage for a given policy period. This type of life insurance provides financial protection to the nominee in case of any unfortunate event with the policyholder during the policy term. Term Insurance policies provide high life cover at lower premiums. The term insurance does not offer any kind of returns to the policyholder, either during the policy period or on the maturity of the policy. 

The purpose of insurance is not to help you achieve your financial goals but rather to ensure that your family & loved ones get financial support after you pass away.

There are many other combinations of insurance-cum-investment products such as endowment plans, ULIP, money-back policies, etc. According to many investment advisors and financial planners, these products which promise multiple benefits have failed to provide enough insurance coverage & to deliver respectable returns.

ULIPs force you to buy investments (equities, bonds, or a combination of both) along with an insurance cover. Every insurance product, except for term insurance, locks your financial commitment in an investment scheme. While endowment plans promise to pay you a lump sum after a few years, money-back plans give back some money at fixed intervals. They fund these paybacks from the investment component of your insurance premiums. 

In the Mutual Fund industry, several independent entities like Crisil are tracking the Mutual Fund performance and Mutual funds also have a mandatory benchmark index which gives a reference point to compare returns. The same is not mandatory for ULIPs. The industry average is to give 10 times your premium as the sum assured and many policies don’t give beyond 25 times. Some policies only give you up to five times your premium as sum assured. The premium you pay has different components such as administrative charges, a commission of the agent, expenses for fund management & the main component actual insurance cover. This also gets accompanied by a lock-in for the sum invested.

As ULIPs are market-linked, the actual fund value on maturity is subject to market performance. In the event of poor market performance, the base capital could also get reduced. In recent times some of the ULIPs have given good returns. However, it is always better to separate your Investment & insurance needs.

Better decision

Invest wisely and diversify your investment in different asset classes such as Mutual Funds, Stocks, Gold, FDs, Bonds, Real estate, etc. Invest regularly and consistently. The investment should be aligned with your financial goals and risk appetite. Embrace good financial habits. Review your portfolio performance minimum annually.

One more insurance protection is necessary for today's period. Buy one Medical insurance for any unforeseen medical emergency. Apart from these try to avoid buying any more unnecessary insurance protection.

Keep in mind, Don't buy insurance as an investment.