Life insurance is the creation of monetary security for your dependents in your absence. Life of dependents such as children, spouse or elderly parents may come to standstill in case of the sudden loss of a sole or primary earner in the family. Until Covid-19 many of us treated insurance as an unnecessary expense. When it comes to insurance or personal finance decision, it is wise to avoid outside noise.
Understanding the difference
Why expense? Life insurance is a service provided by agencies to provide security against critical illness or death and such service is bought by the person insured by paying a certain amount called a premium. Thus, any premium paid to avail insurance policy is an expense in the literal term. There are various types of insurance such as term insurance, endowment plan, unit-linked term insurance, etc. Some of these insurance policies not only refund the amount of premium paid but also provide a bonus amount along with sustained life cover. In such cases, insurance could not be termed as an expense.
Why investment? Buying life insurance is buying peace of mind because once you enrol for the scheme, your dependents’ life remains uninterrupted in case of any fatality to the enroller. Buying insurance is identical to the creation of an emergency fund, where any untimely accident does not cause the life of other family members to come to stand still. Therefore, as a creation of an emergency fund is a sound investment decision, it cannot be said otherwise about buying insurance.
In addition to the similarity of an emergency fund, endowment plans of insurance also provide bonus funds at the time of maturity. Such bonus funds could help identify insurance as a savings tool and thus not only your life remains insured, but also you receive a certain amount in addition to the premium paid at the end of your tenure of the policy. So as a result of characteristics such as emergency funds and savings, insurance could be termed not just as an investment but a sound investment.
The bottom line
Life insurance could be an expense as well as an investment but should not be seen as either of them. An expense is necessitated expenditure without any apprehension of future value addition. Whereas an investment is done with an absolute impression of receiving a certain future benefit. Going by the above explanation insurance is more about an investment than an expense. However, clubbing investment with insurance could harm the very objective of insurance.
As an investment, the subscriber receives the dual benefit of being insured as well as redemption of premium paid along with bonus fund. However, the missing point is that the benefits do not suffice for the purpose for which it is bought. Any individual must buy insurance sufficient to least cover all of his/her liabilities current as well as potential. Whereas to qualify for an investment, it must satisfy the quantum and timing criteria.
For example, if you are saving for a child’s education, the quantum and timing of investment should be such that when the child needs the money it should be available on time and in the expected amount. Saving via insurance fails both the quantum as well timing tests. Since insurance returns are almost guaranteed returns they are calculated with a very low rate of return. Therefore, at the time of maturity, the amount received will not be good enough to cater for any objective apart from the return of the premium paid. Moreover, the life cover is significantly reduced in such plans, thus making it insufficient for dependents to survive.
(Viral Bhatt is the Founder of Money Mantra — a personal finance solutions firm)
