Difference between Insurance and Investment

This is a very common statement, especially in the last month of the financial year. But, there is a problem with this statement. Insurance is not an investment. Although both give returns, the difference lies in their purposes. Let us first break down both the terms to their basics.

What is insurance?

It is the plan you buy to protect yourself financially against unforeseen events. You can get insurance for your car, health, life, and a lot more. Against the regular payment of a premium, you can get the sum assured. If any of the specified events occur, you get financial benefit from the sum assured.

What is an investment?

Investment is when you park your money with a third party to make some profit. You can invest it in several products with varying risks and returns. Generally, high-risk investments give high returns. Investments multiply your money and help you build wealth.

Purpose

Insurance covers risks

By protecting you from emergencies, it secures you and your family financially. You are at peace when you know that a crisis will not catch you off guard. Thus, buying insurance is an ideal plan to mitigate risks. A sudden event can wreak havoc in your business or life. And it can have a big financial impact as well. In the event of a sudden death or accident, you would not want your family to run hither thither to arrange funds. The right insurance policy reduces such risks and circumstances by providing the services in times of need.

For example, car insurance provides funds if an accident leaves you or a third party injured. It also covers the repair cost. It might even pay for the car's replacement, if applicable.

Investment beats inflation

Money does grow sitting idle in a savings account. Depending on your goals, the right investments make sure that you build enough wealth to meet them. But, there is an external factor that can have a huge impact on your goals - inflation. A well-designed investment portfolio can give you higher returns than the inflation rate. Include equities, mutual funds, balanced funds, and debt instruments in your kitty for better returns.

Why just buying insurance is not enough?

Whether you should invest or buy insurance is up to you. It depends on your short- and long-term financial goals. However, only investing or only buying insurance is not a wise decision. Diversification is one of the fundamental principles of managing money. They say, never lay all your eggs in one basket. You cannot undermine the importance of insurance, but you must also invest. A good financial plan must include insurance as well as investment, apart from savings. Insurance will continue to cover you from various risks. On the other hand, investing in different options will make your money grow. Therefore, it is important to strike the right balance between the two.

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Parag Patil is a technical analyst and trading system designer with stock excel programmer. I hope the articles and live chart of nse future and mcx on this Website will be as helpful and profitable to you . I try to update and post new articles tips everyday. My motto is to encourage the traders, so that they should able to understand the technique views behind the moment of stocks. I have deeply analyzed with many technical indicator with parameter and added to my amibroker afl. And even taken backtest report which is never being implemented. Any of the analyst expect me. Seeing all this you may understand that my views is more technical than commercial. If you are profited by my views I fill happy.