What is insurance and what is investment?

What is insurance and what is investment? Insurance is the arrangement by which a company or the state undertakes to provide a guarantee of compensation for specified loss, damage, illness, or death in return for payment of a specified premium. On the other hand, investment is the action or process of investing money for profit.

So, if someone is asked about his investment portfolio, he may consider insurance policies like endowment plans and money back policy as part of the portfolio. With competition increasing, not just insurance agents but insurance companies too are promoting products which show the returns one will get after the maturity of the policy. Nothing wrong with that, but we should understand that for securing our future, we should be investing and not buying expensive insurance.

Right Insurance policy

Typically, people buy an insurance product as investment and not insurance. Term insurance means basic form of life insurance. Term insurance provides life cover with no savings / profits component. A fixed sum of money—the sum assured—is paid to the beneficiaries if the policyholder expires over the policy term. If the policyholder survives, there is no payout. Term insurance has low premium.

Second is endowment plan/money back policy which gives periodic payments over the policy term. To that end, a portion of the sum assured is paid at regular intervals. If the policyholder survives the term, he gets the balance sum assured. In case of death in the policy term, the beneficiary gets the full sum assured.

Now, which would you buy—term insurance or endowment/money back policy? I bet 99 out of 100 people will go for the second choice even though the premium is much higher than the first policy. When we buy expensive insurance, the insurer and the middleman are the winners. Bulk of money that flows into insurance companies is not payment for insurance but for investment products.

Buy a good low-cost term insurance and invest the balance in your preferred avenues of investment. The moment you buy any other kind of insurance, you are actually making an investment that is disguised as insurance. So don't mix insurance and investment.

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