Understanding the Differences Between Insurance and Investment?

difference between insurance and investment

Both insurance plans and investments are critical financial tools that help you accomplish your future goals with ease. However, both of these instruments differ widely in terms of what they have to offer. The main objective of insurance plans is to provide you and your family financial protection. On the other hand, investment plans bring you profits along with the principal amount you invest.

To help find out which one best aligns with your short-term and long-term goals, find out the difference between insurance and investment.

What Is Insurance?

Insurance is a form of arrangement where you or your family members will receive guaranteed compensation against any form of loss. This compensation is offered in return for a monthly or lump sum premium that you have to pay to the insurance provider.

Furthermore, insurance policies come in a variety of forms based on their purpose, such as car insurance, property insurance, life insurance, etc.

What Is an Investment?

An investment plan is a money-growing tool where you give a sum of money or other assets to a third party. In exchange, you will receive that investment amount along with added profits at some point in the future. However, the profits you receive may not be fixed or guaranteed. Based on the type and risk of the returns, investments there are primarily three types of investment options:

  • Bonds
  • Equity stocks
  • Mutual funds

For instance, in a bond, you lend your money to a company or the Government and receive interest in return. As a result, it has a much lower risk, especially in sovereign bonds, where the risk is almost negligible.

Differences Between Life Insurance And Investment

To understand which financial tool is better, you must understand the main points of insurance vs investment.

Check out the difference between investment and one of the essential and long-term committed insurance, life insurance plans:

Points of Comparison Life Insurance Plans Investment plans
Description It is an agreement between policy providers and buyers where they will offer financial compensation as life coverage against an unfortunate event of the policyholder’s demise. These are financial tools where you invest or lend money to a third party for a long or short period of time to receive the investment amount along with added profits.
Reason to Buy To get financial security in crisis situations, reduce expense burden, or provide basic security to your family during your absence. To increase your wealth and build a substantial corpus to meet future goals and wishes by having an additional source of earning.
Risk Component Negligible risks Risks are much higher
Types Whole Life Insurance, Term Insurance, Endowment Insurance, Unit Linked Insurance, Money Back Plans, Child Insurance Plans, Pension Plans Stocks, Mutual Funds, Bonds, Certificate of Deposit, Real Estate Investments, Fixed Deposits, Unit Linked Insurance Plan (ULIP), Public Provident Fund (PPF), etc.
Returns The returns are relatively low and include the sum assured along with occasional bonuses. returns are much higher than in insurance products if invested wisely.

From the difference between insurance and investment, it can be said that both insurance and investment plans are essential and effective instruments that help you fulfil financial goals or simply ensure monetary security for a rainy day. Therefore, there is no correct answer to which one is better.

While insurance products like health insurance are highly essential to avoid expense burdens and secure finances for you and your family, investments could be necessary to build and increase wealth, have a second source of income or keep up in the inflationary environment.

FAQs About Insurance and Investment:

Can I get the dual benefits of insurance and an investment plan from a single purchase?

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Yes. In a ULIP, your insurer will provide your nominees the sum assured as a death benefit if an unfortunate event occurs. Otherwise, you get back the investment returns on stocks or government bonds or debt mutual funds as per your choice. The profit returns from these investments can also be withdrawn after a lock-in period of 5 years.

Is insurance an asset or investment?

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Based on the type of insurance you purchase, it can work both as an asset and an investment. For instance, in whole-life insurance, the premiums you pay are accumulated and build value over time, creating an asset for future goals and needs. On the other hand, plans such as ULIPs can be a compelling investment as they offer high returns from market profits along with the sum assured.

Which is better between insurance and investment?

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This depends on your needs. If your plan is to boost your finances for the near future, then investments are a better option. Conversely, if you are looking for monetary protection for yourself and your family in the long run, then insurance is the right option.