Here are the three factors that differentiate insurance from investment.
Many people believe that insurance and investment are the same things. They have developed this mindset as many insurance companies give customers the option to get their money back. But the requirement of investment differs from insurance.
The objective of the investment is to get something back in the form of returns or interest. On the other hand, insurance is meant for your loved ones so that they don’t have to suffer in your absence. Insurance is not meant for financial goals but as financial aid.
There are many confusions regarding investment and insurance. In this article, we will try to clear your concept about insurance and investment:
The objective of insurance and investment is different. The main objective of the investment is to give returns and achieve financial goals. These financial goals may vary from person to person. The financial goals may be short term goals, mid-term goals or long term goals. Investment options help to achieve these goals.
The objective of insurance is to safeguard yourself from any event that may turn around your finances or puts you and your family’s life in jeopardy. Life insurance is a popular form of insurance. When you take life insurance, in an unfortunate event, your family and dependents get the entire maturity amount.
Another important difference between insurance and investment returns. The main objective of the investment is to fetch returns that will help us to fulfill our financial goals.
The returns given by various savings and investment options also vary. Fixed deposits give a different rate of returns than the recurring deposit. The returns given by debt mutual fund will differ from the returns given by equity mutual funds.
Insurance is not about getting a certain rate of return or fulfilling goals. Life insurance helps to make sure that your family doesn’t suffer in your absence. While many insurance plans give the benefit of money returns, the returns given in these cases is hardly 4%. Also, the cashback insurance plans charge a higher premium for the first five or 10 years. The better approach would be to take term insurance and invest the additional amount in an investment option that gives matches your investment horizon and risk profile.
Investments are liquid than insurance. It is because insurance is linked to a clause such as death. In term insurance, the entire amount will be paid to the nominee. In other insurance plans, after the policy tenure, the sum assured will be given back to the policyholder if the holder outlives the policy term. Although a few insurance plans give money back, it is still illiquid or has a long gestation period.
Investments are highly liquid. Some investment options such as recurring deposits and fixed deposits have a maturity period. Although it comes with a maturity period, customers can redeem investments by paying a penalty. OtherInvesoptions such as mutual funds(except close-ended funds and ELSS) and direct equities have no lock-in period. Investors can redeem whenever they like. Investments come with easy liquidity, unlike insurance.
The objective, rate of return, and liquidity are the three main aspects that differentiate between insurance and investment. Both of them have different goals. Hence, it is better to keep the two in their place and not mix the two.
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