Insurance Premiums are Investments and not Expenses!

Yes, you read it right! Insurance is an Investment and not an Expense. Why is it that I believe that Insurance is an Investment? I will jump on it but first I want to briefly explain what Insurance is and I am sure you must also be knowing what Insurance is but for the sake of setting the tone right, I’d like to go on its explanation first.

Insurance is a Contract between two Parties – The Insurer (Insurance Company) and The Insured (Insurance Taker), wherein the Insurer agrees to pay the Insured an agreed sum of amount in the event of some loss, damage or in case the death of the Insured Person. The Insurer agrees to pay the Insured if there is a Financial Loss to the Insured on the happening of the event.

It is important that the Insured faces Financial Loss on the happening of the said event (mentioned in the Insurance Contract) and only then the Insurer is bound to pay to the Insured. Insurance is divided into 3 types: Life, Health, and General. While Life and Health deal with Living People, General Insurance deals with Insurable Goods and Property.

So why is that I believe that Insurance Premiums are Investments and not Expenses?

Let me be clear that my belief is restricted specifically towards Pure Insurance Plans and not Insurance Plans that are of an Investment Nature. Pure Insurance Plans are plans that pay you only when you suffer a financial loss due to the happening of an event and if you do not face any loss or the event does not happen during the cover period, you lose the premiums that you paid over the years. So it seems actually an expense and when a choice is being given to you between receiving nothing if the event doesn’t occur and receiving maturity amount if the event doesn’t occur, it is obvious that the latter seems more lucrative. But what if the event actually happens? Do you receive the same amount under both plans? No, Because Insurance that has an Investment Option built-in, has a way higher amount of premiums. But we are not here to compare both the options but to discuss whether Pure Insurance Premiums are Expense or actually an Investment?

Pure Insurance Plans have lesser Premium with Higher Sum Insured compared to Insurance Plans with Premium Back Guarantee that have lesser Sum Insured and Higher Premiums. So while you may get your money back with such plans, the sum you receive will always be less than what you may have received if you were Insured in Pure Insurance Plan and that too with lesser Premium. Premiums under Pure Insurance Plans are amounts that you pay for safeguarding yourselves against the Financial Risk if the event occurs in the future. It doesn’t decrease the risk or the probability of the event that will occur but it decreases or even eliminates the financial impact the event might have on you. Premiums are like amounts you collect periodically to use it one day when you require it. If you do not require it, that is okay you do not get the premiums back but the financial impact the event might have on you also didn’t occur.

In the case of Life Insurance, when you buy a term plan, the premiums of a term plan are lesser than premiums of the endowment plan or money back policies with more Sum Insured. With the correct amount Insured for your family, you are in a way appointing a person who will take care of your family’s financial needs in the event of your demise.

While if we talk about Health Insurance, in the event of you or your family member getting injured or any sort of medical treatment that can cost you your accumulations or your Investments can be eliminated partially or completely if you have Health Insurance. You might have to pay premiums for years for one day when you require but the amount you will need that day will be fulfilled by years of your Insurance Premium. If we take a certain assumption for an example, “If you are a Family of 4 Members and you had been paying Rs. 11000/- every year for the last 10 years and only after 11th Year you need to use your Health Insurance which covered a sum of Rs. 3,00,000/- it might not hurt you as you paid in total 1,10,000/- and in return, it paid you 3,00,000/-

While if we talk about Vehicle Insurance, you are riding your vehicle with your risk as well as other riders and other commuters on the road. In the event of an accident of your vehicle can also risk the lives of you, your riders, and commuters on roads. Having a sense of security while you are insured will automatically reduce the risk of others involved. Your Vehicle Insurance automatically insures you – the rider, the vehicle, and the commuters on the road with you (third party insurance) while insuring the riders of the vehicle is optional.

Insurance Plans are like SIP – Systematic Investment Plans. You pay small amounts of money periodically (every year, every quarter or every month) only to use it one day for a specific goal or requirement.

If the requirement doesn’t arrive, that is well and good but we are here to decrease our risk and not expecting to earn from the same. Overall the Insurance Contract is formed on the basis that Insurer will only pay the Insured in the event of Financial Loss.

While we may never wish that the event for which we are Insuring never arrives but we certainly cannot eliminate the possibility of the event occurring and the difficulties it can bring. While Insurance certainly cannot reduce your Emotional Loss but it certainly can reduce your Financial Loss and leaving you a better life ahead. It can give you a reason to fight, to struggle again for the life that is ahead of you. Insurance will eliminate the Financial Barrier that may have been a problem if you had to bear the loss in the event you had no Insurance. While Insurance safeguards you against Financial Loss but it also doesn’t mean that you need to be careless or be less aware while doing regular activities. Remember, Insurance just negates the Financial Risk and not the Risk of the Event Happening or Not Happening.