What is Insurance?
Insurance can be bought by any person above the specified age, for anything from a bank. Insurance generally is purchased to get a reimbursement from uncertain dangers to your property or life. Insurance can be bought directly by going to the bank and buying the insurance you need as per your requirements. Apart from that, with the recent rise of Fintech, online insurance facilities can also be availed. There are various things that can be covered by insurance, such as life, property including cars and buildings, etc.
Before we get into discussing whether insurance is an investment or protection, there are other things we need to understand about “Insurance.”
How Does Insurance Actually Work?
Firstly, insurance is a form of risk management on the individual’s end. In other words, when you buy an insurance policy for a specific object, you want to protect that particular object from the uncertain risks by purchasing a policy. The person who buys the policy is known as a policyholder or insured.
Now, when you buy an insurance policy, you need to pay a monthly premium. The premium is decided by the company, using entities like artificial intelligence and machine learning, on the kind of insurance you need or the one you have chosen. Insurance companies provide you with the benefit of reimbursement of the damage caused to the insured entity. The insurance premium for any kind of insurance policy is always paid in advance.
The essence of the working of an insurance company is that when you buy an insurance policy, you join many others who buy the similar kind of policies. The other members also pay the money for the premium due every month. And these funds are given as “claims to the insurance,” whenever required.
Insurance is a legal contract which is time bound. Insurance bought will have a specified date when the contract will expire. And this is when the money is paid out to you. In case you do not use the insurance, you will get the money you invested into the policy plus the certain amount of money which was paid as the premium. The details for this payout in the end, are also specified in the legal contract you are given when you buy a policy. Also, whenever you need the insurance, you must know that there are certain expenses that you need to make from your own pocket. The money will be reimbursed to you later, but first, you will be required to pay.
Is Insurance an Investment or a Protection Against Uncertainties?
Whether insurance is an investment or protection, is a huge question in today’s time. Insurance policies are bought from a bank or any other policy lender. The main point to understand here is that a sum of money is required to purchase a policy. Another point to remember and read into closely is that any kind of policy bought or taken is for uncertain risk management.
The essence of buying a policy for whatever object as chosen by you is to be protected against unforeseen happenings that may arise due to uncertain circumstances. For example, your house might catch fire, your car may become damaged, or you are diagnosed with certain health issues. All of these issues come unannounced. And to be prepared for these issues, we buy policies.
Many people confuse it as an investment, which is wrong. Investment is when you put your money into some instrument that pays you a fixed amount either monthly, quarterly, half-yearly or however the investment policy states. An investment pays you a return; it gives you a dividend. And above all, it increases your earnings. Whereas, in the case of an insurance policy, the money is paid by you to a company in order to protect your assets. So no, Insurance is an insurance, it is not an investment, not a business loan, nothing.
It may sound confusing, but it isn’t. In simple words investment gives you more earnings in the form of dividends or any other forms. The money received from an insurance policy is a “claim to the insurance” not a dividend, it does not add to your earnings in any way.
To conclude, an insurance policy of any object or asset is for the protection of the said asset and not an investment. Insurance policies will provide you with claims and not dividends or earnings.