Rethinking Insurance: Is it merely an expense, or a vital tool for securing our financial future and peace of mind?
Despite its vital role in mitigating risk, insurance continues to be perceived by many as an unnecessary expense rather than an essential investment. This misconception often stems from the variety of complex products available today, which blur the lines between insurance and investment, leading to debates about whether insurance is merely a cost or a valuable asset.
Chenthil Iyer, a SEBI-registered financial advisor, firmly believes that insurance should primarily be viewed as an expense. He states, “While it provides security for your loved ones in the event of your demise, it is fundamentally a risk mitigation tool, not an investment vehicle.” The cost structure of insurance policies, especially life insurance, includes mortality charges and administrative expenses. Mortality charges fund claims, while premiums cover operational costs.
Iyer points out that the inclusion of investment components often complicates the cost structure, rendering insurance less effective as an investment. For example, in traditional products like endowment and money-back policies, the lack of transparency regarding premium allocation creates confusion about the true costs involved.
The Investment Perspective
While insurance is mainly an expense, some advisors argue it can serve as an investment under specific conditions. Deepsh Rawat, another SEBI-registered advisor, insists that while insurance is necessary, it should not be seen as a primary investment. “Such products tend to be costly and less flexible than other financial instruments,” he explains.
Financial planner Raghaw acknowledges exceptions where insurance might be viewed as an investment, particularly for those seeking tax-efficient returns. “In cases where fixed deposits and debt funds face heavy taxation, tax-free insurance returns can be appealing as part of a broader financial strategy,” he adds.
Making the Right Choice
Both Iyer and Raghaw recommend steering clear of traditional insurance products that lack transparency. Iyer emphasizes the importance of understanding how premiums are allocated, while Raghaw notes that unit-linked insurance products (ULIPs) offer greater clarity and may serve as a more suitable investment option. For those seeking fixed income, traditional endowment policies or term insurance plans may still be appropriate, especially non-participating ones promising fixed returns.
Conclusion
In essence, insurance should primarily be viewed as a necessary cost for risk management. However, under certain conditions, it can also function as an investment. Both experts stress the importance of making informed decisions based on individual financial circumstances and the specific characteristics of the insurance products available. Ultimately, while insurance provides personal and business benefits, its core purpose remains to offer security against unforeseen risks.
Disclaimer:
The article is for information purposes only and is not an advertorial. Please read the scheme related documents carefully. Arjit Garg, Digit Partner Code: 1186275
