Financial Planning: Insurance should not be an investment

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Published: August 24, 2016 6:05:26 AM

A life protection cover should never be seen as a means to multiply investment into wealth

People often confuse insurance with several other financial instruments available in the market. Any kind of investment normally involves one-time or periodic payments for a certain tenure and returns into the hands of the saver, in the form of more money, either by accrual of interest or dividend, or through the appreciation of the assets in their market value.

Transactions for insurance also begin in the same manner, creating an illusion of similarity with savings. Most people believe that by paying premium, they are ensuring for themselves return of their money with some appreciation. Most of the promotional messages from insurers, too, emphasise on returns by highlighting prosperity, which they claim that their products would ensure.

But the fact remains that savings instruments and insurance are fundamentally different financial products and they exist in market at the same time because they serve two very different needs of the people. Yield is the main driving force behind savings or investment instruments, while the of one’s current financial status and of one’s future income is the motivation behind buying of an insurance policy. Insurance is therefore a tool to ensure financial stability during one’s life and even after.

Insurance comes to one’s rescue when huge financial outgo following unforeseen events affecting one’s life, health or property tend to paralyse one’s entire financial position or planning. Insurance compensates to a very large extent sudden demand on one’s finances and helps the policyholder to quickly regain one’s normal financial status. Sudden demise of the bread earner is the worst that can happen to a family.

The tragedy robs the dependents of future cash flow needed for dignified living. Similarly, if any member of the family suffers from any disease requiring hospitalisation or surgery, the family has to incur huge expenses. Health is an issue where people would generally not like to compromise on the quality of treatment. Hence, the family is obliged to spend much beyond one’s means. The worse happens when, unfortunately, anyone in the family is affected by one of the critical illnesses such as cancer, kidney failure or stroke, leading to lifetime dependency on medicine or physical care. The families of victims not only suffer from acute financial burden, but in many cases, feel devastated. The health insurance policies are designed to take care of such expenses. In most of the cases, cashless hospitalisation facility is also available.

Insurance of automobiles, house property and jewellery etc is equally important for anyone for maintaining the equilibrium of one’s finances. Damage to the vehicle by any means, including flood or riots etc, may lead to total loss. In such a situation, the insurance policy comes to the rescue of the owner. Flood ,earthquake or fire can cause serious damage to house property. A policy for house protection comes handy in such situations. Similarly, the credit life insurance policies take care of full repayment of the outstanding housing loan if the borrower unfortunately dies.

In all the aforesaid circumstances, the role of insurance as a financial tool is to provide stability to one’s finances in the face of unforeseen circumstances causing potential paralysis of an individual’s personal finances. The endowment policies do give the impression of being saving plans. But the buyers of such policies must understand that the policy’s primary function is not growth of money paid as premium, but providing reasonable lump sum amount to support a person in his post-earning life. For those who unfortunately do not survive the term, the same amount is paid to the family irrespective of the years for which premium have been paid.

Buying any kind of insurance is a prudent decision to protect one’s finances or financial planning from getting destabilised due to unforeseen mishaps. Insurance is never a means to multiply investment into wealth.

The writer is former MD & CEO of SUD Life (an Indo-Japanese JV)

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