In India, most people have this misconception that financial planning is all about investments. However, the truth is financial planning is a much broader concept. It involves several aspects of money management like budgeting, dues and liabilities, credit management, tax planning, and insurance and investments.
Insurance and investment are the most important bricks that form the foundation of a sound financial plan. Insurance and investments are entirely different financial products, and they serve different purposes. Hence, you must not consider insurance as an investment.
When you buy a life insurance policy, you essentially purchase financial protection for your family against future uncertainties that can adversely impact your finances. Although no amount of compensation can replace the loss of human life, an insurance plan can help you mitigate the financial impact it can have on your family in the event of your sudden demise.
No matter the type of life insurance you buy, be it a term plan or any other plan, you must pay the premium to the insurance company. In return, the insurer agrees to pay the policy benefits, i.e., the sum assured to your family members in the event of your unfortunate demise. In a nutshell, the insurance policy acts as an income replacement for your family in your absence.
Why Insurance is not an investment?
In simple terms, an investment is a financial product that helps you generate wealth in the long run and build a corpus. You can invest in different products based on your understanding of the product, returns expectations, risk-taking ability, and financial goals.
You can invest in multiple products simultaneously to diversify your portfolio and mitigate the risk potential. Based on the investment you choose, you can get periodic returns, as applicable with fixed income schemes like bank fixed deposits.
While some insurance policies like the ULIP (Unit Linked Policies) and Retirement Plans have savings and investment components, the returns offered are incomparable to pure investment plans like mutual funds. Also, if you hold a term insurance policy, you do not get any returns, either on the survival of the policy term or during the policy tenure.
The main purpose of an insurance policy is to provide your family with financial protection against uncertainties of life and not to help you accumulate mass wealth and become rich. It only ensures that your dependent family don’t face any financial hassles when you are no more.
Why do people confuse insurance for investment?
One of the significant reasons people consider insurance as an investment is inadequate financial knowledge about insurance and investment products. Also, with the growing popularity of the new-age hybrid insurance-cum-investment products such as ULIPs, money back plans, people believe insurance is an excellent investment avenue.
However, you must know such policies fail on both fronts. Neither do they deliver substantial returns, nor do they provide adequate insurance cover.
What should you do?
The premium for the hybrid insurance policies is generally much higher than the pure protection plans like term insurance. So, many experts recommend purchasing term insurance with high coverage to meet the family’s future needs. And for investment purposes, it is better to choose a pure investment plan.
Make sure that you choose your investments carefully based on your long-term and short-term goals, risks involved, etc. Also, you must monitor your investments regularly and take necessary corrective actions when needed.
