Is Insurance An Investment? Yes and No.

We all wonder about Insurance policies and whether we should categorize them as investments.
According to Merriam-Webster Dictionary, Insurance is a 'coverage by contract whereby one party undertakes to indemnify or guarantee another against loss by a specified contingency or peril.'

Insurance is a financial product which helps us to channel our funds to protect us from future contingencies. We transfer our risk to an Insurance provider by paying insurance premium.

So, the payment of premium seems similar to the installments of recurring deposits and in fact, when we have a policy which provides us a lump sum amount at the end of the term or some return in between, it does look like an investment. Not to mention, Unit Linked Insurance Policies (ULIP) which provide returns depending on the share market investment of the Insurance company.

But is it really an investment?

The YES answer is because it’s an investment in your future and in your life. 

1. You protect your family by helping them have a financial support after an unfortunate incident. 

2. With health insurance, you protect your finances by having the insurance company cover the health and medical expenses. 

3. Accidental insurance helps you recover from an accident quicker since the expenses are covered. 

4. Cancer protection insurance helps to pay some early stage treatment too. 

5. In some countries, the Income tax Laws allow you to use the premium paid amount to decrease your tax liability and thus, you pay less taxes which indeed, helps you increase your savings by less payment of taxes. 

6. Mandatory vehicle insurance and travel insurance helps to recover financial loss which may have got overlooked.

The NO answer is because insurance is not meant for profit but to mitigate the loss and help the insurance policy holder to make the situation as it was before any unfortunate incident. 

1. The returns your get from insurance policies may be equal or more than what you paid as a premium but since you earn the amount after many years, the amount you get doesn’t have the same Time Value of Money as it was before, in simple words, $500 in your hand now can help you buy more stuff than $500 after 5 or so years and the reason is inflation and price changes. 

2. Insurance does not help create additional wealth because it is not meant to be used as an investment to increase returns but to be used as an investment to decrease losses due to unforeseen events.

Exact answer.....

So, if you are trying to find the answer for an exam or a thesis paper, you should follow a textbook referred to you by your professor or mentor but if you want a personal answer, then insurance is an investment in your life and not a financial investment to get high returns like Mutual Funds or Fixed Deposits.

Something about the Insurance industry....

I have done 2 months internship at a Life Insurance company and during that period, our mentor said that the insurance industry is trying to help humanity. Those working in insurance industry are doing a good work for the society. This is evident when we hear the incidents of families getting financial help due to insurance of a loved one who passed way suddenly. There are those who recovered financial losses due to fire at their home, workplace or film studio.

As a customer, you are helping your family and yourself to be stress-free by purchasing insurance. Especially, whole life or Term plans. It’s not a substitute for any Fixed Deposit, Mutual Funds or Bonds but then, there is no substitute of insurance policies ever possible. It’s a unique product which everyone should purchase because your health and life should be your priority over any financial gains.

Here's what Investopedia has to say about Insurance- Is Life Insurance a Smart Investment?

© Copyright to DarshD 2019,

Please comment or mail at darshd555@gmail.com for any feedback or suggestions. This text can be published or reused with my permission or  at least by mentioning of my Pen name (DarshD) and providing a link to this blog. So, feel free to share or include in your textbooks. Also, consult your financial adviser, family and lawyer before making any big financial changes or big financial decisions :)