This blog post explains the difference between Investment and Insurance. Most of the time people confuses both savings and the insurance. Some times without proper knowledge investing in the insurance will eat your money. Here you will see a simple example explains all that. If you have any thoughts please post it in the comments section. Subscribe to our future articles here.
What is Insurance?
Insurance is nothing but an agreement between the insurer (The Insurance Company) and the insured (You) to pay an amount as compensation if any unexpected event occurs. This amount may vary from a few hundred to even a few crores. The maximum amount the insured person can claim depends on the amount agreed upon as per the insurance policy. The concept of insurance is brought into the market only because of the family protection in case if the only earning person died unexpectedly.
Read: What is Term Insurance?
But, because of the market competition and pressure on selling more number of units, companies started rolling out the insurance policies with the mix of other features which is naturally exist in any other investment products. Unfortunately in India, there is very less steps taken to educate the customers about the insurance and financial planning. It is our life, customers should be very careful on their family and future.
Difference between Insurance and Investment
A lot of confusion on the difference between investment and insurance. Investment is something that we save up to use while we are alive. Insurance is something we save up for our family to use once we are gone. The goals of Investment and Insurance are totally different. A lot of us take Insurance policies as investments. This is the reason why there are a whole group of people running behind us
telling us how great their new Insurance policies are.
Let me explain with a simple arithmetic. Assuming you pay an Insurance policy premium of Rs. 25,000/- for a policy that would mature in 20 years The Insurance agent would have told you that the policy is worth Rs. 5 lacs and you would get a bonus amount equivalent to it and hence you would be getting Rs. 10 lacs at the end of 20 years. This is a big amount and obviously most of us would be lured into taking this policy. What do we forget here?
- A fat portion of the premium we pay in the first few years would be paid to the agent as a commission
- Every year a portion of your premium (Atleast 2%) would be paid to the agent as a commission
- The Insurance company would deduct a portion of our premium (Atleast 5%) as mortality charges.
- The Insurance company can invest only in debt instruments and hence the returns on our investments cannot exceed 8 or 9 % per annum.
Assuming you invest the same Rs. 25,000/- every year in a bank Fixed deposit that earns an interest of 9% per annum, what do you think will be the maturity amount? You wont believe me. It is Rs. 13,62,745/- which is Rs. 3,62,745/- more than what your insurance policy would give you. (Assuming what your agent said was true and you would get Rs. 10 lacs)
You will be wondering how this amount of more than Rs. 3 lacs got reduced. The answer is simple: “COMMISSION”. Your Agent eats this amount from your investment and hence you are getting only 10 lacs.
I hope this article would have provided few basic ideas on the mistakes you are doing. Please take this article as first initiative to review your portfolio and see if there is enough term insurance is taken or market linked products. Share your thoughts in the comments section.
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