Insurance Vs Investment
Insurance and Investment are both important parts of one’s financial planning. They work together to ensure your family’s future and provide peace of mind during your death. However, it is important to differentiate between the two.
Investing means giving your money or assets to a third party in exchange for interest and returns, which can be derived later. This could include a bond or stock.
On the other hand, life insurance is designed to pay out a lump sum upon your death. The proceeds can be used for various purposes, including paying off debts, paying for college tuition for your children or even making a down payment on a home.
Cash value: Some permanent policies, like whole life, have a component called cash value that can be invested to grow tax-deferred. A portion of your premium goes toward your policy’s cash value, and the money grows over time based on a fixed rate set by the insurer.
Universal life: This type of policy allows you to adjust your premiums and death benefit within limits and invest some or all of the cash value in various investment fund options that mimic the performance of the market. This flexibility provides more growth opportunities and can be more attractive to many than a permanent whole life policy, which offers guaranteed death benefits and cash value growth.
Variable Universal Life: This type of policy offers a similar cash value guarantee to a universal life policy, but lets you invest some or all of the cash value in investment funds that mirror the market. This type of investment option can offer more potential for growth than a standard universal life policy, but it comes with greater risk and fees.
Investments are liquid – they can be transferred to a bank or other financial institution in minutes, while insurance is not. In terms of term insurance, the entire sum assured will be paid to your beneficiaries if you die during the policy term. In addition, the cash value of these policies is not generally available to claim back later.
This also means that the return of a life insurance policy can be very minimal. Hence, it is not recommended for everyone to invest in this product.
In general, investments have higher returns than insurance, and are liquid – they can be converted into cash at any time. In contrast, in the case of a term insurance policy, the funds are not always available to claim back.
While investing, you can choose to buy shares of stocks, bonds or mutual funds. The risk of losing money or your capital is low, if you have the discipline to stick with the fund for the long haul. ULIPs: Conclusion: Unit-linked insurance policies (ULIPs) are another popular form of investment. These provide liquidity in the form of cash at a relatively short notice.