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Why is insurance an expense and not an investment?

Insurance is not for the investor in you but the individual and family man in you. Insurance protects your dependents and your assets (non-financial) from uncertainty.

Life Insurance Council, which is the body that represents Life Insurance companies in India, is going to launch a campaign to promote the idea that life insurance policies are a must have for Indians. It has been called the “Mutual fund sahi hai” campaign of insurance companies.

The campaign slogan is “Sabse Pehle Life Insurance”. Catchy. The tag line literally means “Before all else, life insurance”. What does this have anything to do with you as an investor or a potential buyer of insurance policies? 

Buyer not investor

The semantically inclined amongst you must have noted we said “buyer” of insurance policies and not “investor”. 

This is an important point to note because as we have mentioned in other articles, we are often “sold” insurance as a savings product rather than a protection product. Insurance is not for the investor in you but the individual and family man in you. Insurance protects your dependents and your assets (non-financial) from uncertainty.

Why an expense?

An expense is basically when you buy something, or a benefit, for money. In the case of insurance, you are buying protection against uncertain events that might impact your future plans or commitments.

You should not discount the possible impact of improbable events and that is why you plan for them. Most likely most of us won’t meet an untimely end. But as morbid as it sounds, we can’t completely discount the possibility. 

A life Insurance policy is thus a way to protect your earnings in case we are no longer around to earn.

Too much may depend on our ability to earn when our family and close ones depend on those earnings. A life Insurance policy is thus a way to protect your earnings in case we are no longer around to earn.

The insurance company that allows this protection takes the chance that an untimely demise is a low probability event. It has sophisticated systems in place as well as actuarial professionals who assess risk and know that there is a certain sum, they can charge you, given the insurance amount that could be a potential pay out. 

The risk is merely transferred from you to the insurance company. You pay for this service. That’s the insurance premium.

Why not an investment? 

When you invest you expect only growth for a certain amount of risk. There is always the risk of loss unless you are investing for low returns in secured investments (like government bonds). But your goals inform the choice of actual instrument.

Insurance products when touted as investment products mix two different things. Both insurance and investment are requirements but buying pure insurance is orders of magnitude cheaper than buying insurance + investment products like endowment plans. We have shown the difference in this article.

It’s better to invest separately as you would have different goals which require different time periods and rate of return, not to mention risk exposure. Most insurance products posing as investment solutions don’t offer the right kind of return that is required, especially for long term goals. 

Assumption for a 30-year-old male who “invests” in a non-term insurance policy:

They offer short term fixed income kind of returns for a long-term requirement. This is not great for your financial plans. So do the smart thing. Separate your investments and insurance as you are unlikely to achieve either of your goals if you don't do so. It is cheaper and smarter to buy pure insurance depending on your needs. For investment goals, invest smartly rather than buying insurance. 

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