Why is Life Insurance not an Investment?

Every individual tries to save at least a small part of their earnings because life and financial circumstances and needs can change in a blink of an eye. Insurance is regarded as the safest financial instrument to safeguard the uncertainties of the future as it provides safety against financial losses incurring from life loss, loss of health, property, and also against theft or any damage caused unintentionally. Life Insurance is not an Investment, this may occur to you. 

Investment has various forms, it can be in the form of share market investment, bank fixed deposits, purchasing an asset, investing in government bonds and CODs, etc. Investment is made to secure the financial needs of the future and to gain from the market over time. It is also the instrument to fight against inflation which is always on the rise. Investment can be active or passive depending on the financial need of the investors. The investor may want to invest in making a profit on a regular basis or maybe for having a saving his life after retirement. Investments are also done for specific events which require a lump sum outflow of money like a child’s higher studies, marriage, etc.

Life Insurance 

Life insurance is the most common type of insurance product that every earning individual should purchase over their lifetime. It assures a lump sum amount of money to be paid in the event of loss of the insured person to secure the life of his or her family members and dependents. It is one of the most useful and important financial instruments for every family because there is no guarantee for life.

This Term insurance policy is the cheapest form of life insurance policy where the premiums are very low. The policy lasts up to a period of 10-15 years or so depending on the choice of the insured person. If the insured person passes away within the term specified in the policy, then the insurance company will provide the assured sum to the nominee or the family members but if the insured person survives the term, then there is no return. Few companies renew the policies if the investor wants otherwise there is no return of money. In a few companies, the amount of premium is refunded to the investors.

How Investment and Life Insurance are different?

Though both Life insurance and investments are purchased to secure the future’s financial needs Life insurance is specifically purchased to meet the financial obligations that occur after the death of the earning member of the family and for holding on to the same financial status in most of the cases whereas on the other hand investments are made to reap profit in the future.

Here is a detailed comparative analysis on Life insurance and Investment which might help you in your financial decision making:

• Liquidity: In the case of Life insurance, liquidity is not a big concern as life insurance policies are purchased to safeguard the livelihood of the family members in case of the demise of the bread earner of the family. The family gets the assured sum of money when the insured person loses his or her life naturally or in some accident. In the case of investment, liquidity is more important because the investors may have short or long-term commitments to the market. An investor can liquidate his investment at any particular point in time by selling his or her shareholdings in the market.

• Transparency: Life insurance companies pool investments from all policyholders to pay the amount claimed by the other policyholders. This is the way any insurance company works and whether they invest the pooled money into some funds or other investment is not a concern for the policyholder. On the other hand, investment in any company’s share or debt or buying government bond is having the ownership of that company where you need to have a clear-cut idea of the company to optimize your profit and that is why transparency is way more important while you are investing in equities or bonds.

• Charges/costs: For life insurance policies, you need to pay premiums at regular intervals like monthly or yearly to continue with the policy. Here you don’t need to pay a hefty sum of money to buy the policies rather premiums are proportionate according to the sum assured. Investments are different as the money you invest and the money you receive is completely dependent on the performance of the share or bond or any other financial instruments in the secondary market. Here you have to buy the whole of the share and you cannot pay any proportionate amount. Moreover, investment requires brokerage fees and other related charges.

Keep Your Life Insurance Separate From Your Investments

It is advised to keep the life insurance separate from investment because the share and bond market can crash, the bank can decrease their interest on FDs, the price of land or any asset can get devalued, and so on so forth. Investments are highly profitable if you can take the risk but life insurance is not for taking the risk rather for mitigating it. Life insurance can fulfill every kind of your need in life, but life insurance has a different motive and it serves you in a different way. 

It’s quite true that, if you are thinking that life insurance works as a share market then still you need to know about the life insurance policy. It may help you to lose your financial burden in your worst time, but it hardly provides you money directly, and investment means getting money back on that investment.

Conclusion

You must analyze your financial needs before investing in any of the financial instruments whether it is insurance or any form of investment product. Both have different aspects and your financial decision should be in accordance with the same. If you want life coverage to secure the future of your family go to the life insurance policies and if you want to accumulate wealth over time, invest in your financial instrument.