You may have heard that one of the best financial decisions that you can make is to purchase an insurance policy to cover you in the case of an unexpected loss.
It is easy to assume that you made some sort of “investment” when you purchased this policy, but that couldn’t be further from the truth.
Today, I am going to go over the differences between Insurance and investments and why they should never be put in the same category.
What Is an Investment?
The first thing that we need to understand is what an investment actually is. According to Investopedia, an investment is an asset or item acquired with the goal of generating income or appreciation.
This means that when you put money into an investment, your primary goal is to generate income or appreciation for it.
Some examples of things you can Invest in are:
- Real Estate
- Small Businesses
- The Stock Market
- An IRA
- An HSA
- An Idea on Kickstarter
You can even invest in things like business software such as online calculators or bookkeeping platforms since they can help increase your businesses efficiency or offerings to your customers.
As you can see, when something is an investment, the outcome is all about obtaining some sort of financial gain.
What Is Insurance
At Simply Insurance, I like to use the saying “In Plain English” because there is no better way to try to explain something.
“In Plain English” – Insurance is the protection against an unexpected loss.
When you are buying Insurance, you should be thinking about:
- What would happen if you were to lose what you were insuring?
- What would the financial burden be because of your loss?
- Who would all be affected most by the loss?
- Could you afford to lose an uninsured item?
Some examples of things you can have Insurance on:
- Your Life
- Your Home
- Your Car
- Your Phone
- Your Health
- Your Pets
- Your Paycheck
It is easy to see by looking at the above list that when you purchase Insurance the only way it actually works out for you is if you lose something in the first place.
This is the complete opposite of what an investment is supposed to do and how they work.
Insurance vs Investments
|Purchased to Protect Money||Acquired to Make Money|
|Will Replace What Was Lost||Can Help Accumulate Wealth|
|Only Can Be Obtained with A Loss||You Can Access Investments Without A Loss|
|A Set Price for Set Amount Of Coverage||Investments Are Not Guaranteed|
|You Have to Lose To Win||You Win Some You Lose Some|
Why Investments Don’t Work as Insurance
The primary problem with investments is that they don’t always work in the way you intended them to work.
When you invest in Real Estate, for example, the property may not appreciate, rents may not go up, or your expenses could be much higher than you anticipated.
You might not be able to rent it to a stable renter, or you could just run out of money and be unable to pay the mortgage and lose the home.
In the stock market, your wealth can go from Hero to Zero in an instant. Forbes used to even have a tracker that would show Billionaires losing millions of dollars in a day in the stock market or gaining millions of dollars.
Investments can make you or break you; it is all about your risk tolerance.
There are also things that people consider safe investments like a Vanguard Index Fund where you place your money for long term gains.
However, none of these investments are being purchased as a form of “Insurance” for your life.
Why Insurance Doesn’t Work as An Investment
When it comes to Insurance, it usually will only help you once you have lost something.
You don’t purchase it with the expectation to gain anything other than what you already lost.
Just think about any type of Insurance you have, if you were to lose the item you insured, more than likely you will be back to square one.
Being back to square one is 100% better than being in the negative any day of the week, but insurance companies aren’t in this to make you rich.
They are here just in case you ever need them and guess what, there is a possibility you will never need any of the Insurance you are paying for.
However, that is part of the risk both you and the insurance company take, you hope you never have to use it, and they hope you never have to use it.
But if you do suffer a loss, the Insurance will put you or your family back at square one.
You Can Have One Without the Other
In closing, just remember that Insurance is only Insurance, it wasn’t created to do more than protect you from a loss.
You can have tons of Insurance and never have 1 investment, and you can also invest in something without having any type of Insurance.
If you treat Insurance like Insurance and investments as investments, you will keep your mind free of headache and won’t make rash decisions about Insurance as investments.
It’s just plain wrong to tell someone your investments are in insurance products or that your insurance products are investments.
By Sa El
This article represents the opinions of Sa El, and not necessarily those of Casey Fleming or FinancialHelpDesk.com.. This analysis was prepared with the best information available at the time it was written. This article is not meant to be construed as financial advice. Your personal financial situation may call for completely different solutions than what is recommended here. Please consult a financial advisor for customized advice tailored to your specific needs and concerns.
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