Investment Versus Insurance: Understanding the Difference

Investments and insurance remain two crucial pillars of financial security. Both solutions are useful to hedge against different financial situations in the future.  

An investment typically is the purchase of an asset.  The asset class may include equity market investments, stocks, bonds, gold, and real estate, among others. They seek to offer purchasing power to an investor at a time in the future, often to meet a specific financial goal.

Generally, investments involve setting down funds with an asset management or investment company for a specific period after which the said funds are returned or reinvested along with a pre-defined investment return. 

While investments tend to offer higher returns, they also come with a certain level of risk. Also, as per the investment type, the degrees of risk tend to vary. The rate of investment returns rises as the risk increases. Also, there are quite a few investment instruments that may offer some or no guarantee of the safety of principal or interest amounts. Real estate investments and government bonds (treasury bills) remain an exception, though.

Among insurance, life insurance is a longer-term financial protection to the family of an insurance policyholder in case of one’s death or disability. As a pure risk or investment-linked policy, life insurances offer a guaranteed form of protection for the financial well-being of the family while also offering some investment returns. This is at lower rates than regular investment instruments, though.  Similarly, health insurance aims to take care of the financial burden associated with escalating medical expenses.

However, it needs to be understood that insurance is not an investment. For example, when an individual invests money in an asset class, there are certain expected returns. But in the case of pure-term insurance, it is only in the eventuality of the death of an insurance policyholder, the nominee gets something. Also, in case the policyholder survives, no one gets anything.

Ideally, opt for a term cover insurance that is large enough to address the future needs of the family in the case of the demise of the policyholder. In addition, make investments in suitable asset classes after taking into account the investment horizons, financial goals, and risk appetite. Diversify the investment portfolio and keep an eye to optimise risks, and returns.