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The debate between insurance and investment always stumps individuals when planning their finances. Both these concepts serve different purposes; life insurance helps protect an individual against financial loss and investment aids in growing one's wealth.
We all have dreams. Some dream of buying their own house, touring the world, spending their retirement comfortably, or accumulating a good corpus for their child's education. Whatever the goal, a robust financial plan is a necessity to turn it into a reality. It acts as a roadmap for your future, and more people are now realising the importance of investments and insurance.
However, many people are unaware that insurance and investments support different goals and hence must not be used interchangeably.
In the article below, we shall understand what these terminologies mean and the key difference between insurance and investment.
What is Insurance?
Insurance is a legal bond or agreement between the insurer (insurance company) and the insured (individual or anyone buying the insurance). Under this legal agreement, the insured receives financial protection from the insurer if the former suffers loss, injury, or damage under specific circumstances.
For example, in a life insurance plan, the insurance company agrees to pay a certain sum of money to the insured or the life assured in case of an unfortunate event of death in exchange for a premium.
Life insurance policies are designed to provide financial security to the deceased family. Thus, the main aim of a life insurance plan is to provide you and your family financial protection. Similarly, non-life insurance or general insurance policies are those where the insurance provider offers to compensate for losses incurred from a specific financial event. Some common non-life insurance types are health insurance, motor insurance, travel insurance, commercial insurance, marine insurance, etc.
Why Do You Need Insurance Plans?
Life insurance plans provide financial assistance to the policyholder’s family in case of the policyholder's unexpected death. Some life insurance plans may also have an investment component (ULIP#) or come with guaranteed1 returns benefit, thus helping accomplish the family's financial goals.
Health insurance policies help you pay for medical emergencies, hospitalisation costs, etc.
Motor insurance, including car and bike insurance plans, is mandatory for your vehicle to be eligible to run on public roads. Comprehensive plans also safeguard the vehicle, third-party injury or property damage and offer personal cover to the policyholder.
Home insurance plans offer coverage to your homes in case of accidents, natural calamities or mishaps.
What is Investing or Investment?
Investing is allocating funds with the aim and expectation of generating profit. Investments like shares, bonds, property, or any other financial instrument can be made in a tangible or intangible form. You may choose from the above options depending on your risk profile and the ability to invest. The returns or profits earned may not permanently be fixed or guaranteed.
Investments are made with the prime purpose of growing an individual's wealth.
Why Do You Need Investment plans?
Your investments earn returns, which are reinvested to earn further returns, thus offering you significant returns over a long period. This is called the power of compounding.
It can act as a source of second income.
It helps you achieve your financial goals.
Long-term investments can beat inflation and fight against market fluctuations.
Insurance vs Investment
As mentioned above, insurance is of different types, each serving a different purpose. For ease of understanding and finding common ground for comparison, we shall differentiate between investments and life insurance plans.
The below table will help you understand the difference between life insurance and investment.
Parameter |
Life Insurance |
Investment |
Meaning |
It is a protection tool that safeguards the financial stability of your family in your absence. |
It is a financial product to help you create sustainable wealth for the future. |
Purpose |
Life insurance policies offer financial security to your dependents, like parents or children and reduce financial burden in your absence. |
Investments help you meet your long-term financial goals like purchasing a house, your child’s education, starting a business, etc. |
Risk factor |
Traditional life insurance policies involve low to negligible risks, and the nominee will get death benefits if all premium payments are made on time. |
Investment products carry risk depending on the type of option selected. |
Common types |
|
|
Returns |
The returns from a life insurance policy include the death benefit, maturity benefit and bonus accrued over time. The overall return is relatively low. |
You may enjoy higher returns if invested wisely. Diversification and time horizon play vital roles in overall returns. |
[Note: A ULIP or Unit Linked Insurance Plan is a combination of investment and insurance where a part of the premium goes toward investment.]
Conclusion
Nowadays, insurance and investments form the crux of a financial plan and have become inseparable parts of modern living. The reason why you must opt for insurance or investment products varies, but having both is crucial. Hence, it is always recommended to set your goals and choose the correct insurance plan or investment avenue that best aligns with them. Investment can be considered a tool for achieving financial goals, whereas insurance can be considered financial aid.
