Insurance as an investment: The biggest scam
Majority of those who purchase life insurance were constantly bombarded with advertising proclaiming the benefits of this product. However, as is often the case with these types of advertisements, there is more to it than meets the eye.
Insurance companies charge policyholders a premium at the time they buy a life insurance policy in order to cover the risk that they will die during those years while they are paying premiums.
Insurance is paying money for relieving the fear of loss. You are not buying protection against overall loss.
Many people fall for the marketing propaganda of insurance companies because they lack the financial literacy and knowledge to realize that purchasing insurance is like gambling. The odds of winning are strongly stacked against you. And that’s exactly why there are only around 8 million millionaires in the US, out of 329 Million population.
With insurance, you can either not lose, or not lose. There is no option to ‘win’.
What is insurance, what is not?
If insurance comes with a scheme which makes it look like a long term investment, then it is a scam, direct or indirect. While life insurance does protect you against the risk of dying during a period of time, it is not an investment.
An investment is something that earns money for you by providing goods/services or yielding a return for you. You can lose and win in investments. You can also earn a substantial amount of wealth from investing. For instance, Peter Lynch increased the fund’s assets under management from $20 million to more than $14 billion between 1977 and 1990.
On the other hand, your insurance premium will be used to cover costs and expenses incurred by the insurance company during those years until your death, if it happens to occur. This money will be paid back to your beneficiaries if you happen to die within this period of time before your premiums are paid in full and you end up saving nothing.
Since it is “insurance”, you will never see any profit from this investment. You are only buying an illusion – that your family is going to be able to live in comfort if something happens to you and you die before the payment period ends.
The well-known fact is that the insurance company wins, not you. You buy ‘peace of mind’. And for that, you either lose money, or lose something else and get paid for it. Again, you are buying peace of mind. That is what insurance actually is.
Is investment the best option, then?
Investment can not be referred to as a better option straightaway. After all, we exist due to our uniqueness. Some people would still happily trade their peace of mind for money.
The risk takers prefer investing for the potential of big returns than buying life insurance. Risk takers take a chance with their investments and make money to be able to provide for their family. Since the future is uncertain, the potential for loss is also there.
A set of calculative investors prefer to not lose their assets; hence they buy insurance instead – after all, no one wants to lose what they worked so hard for. Life insurance costs less than investments, which require time and effort to develop returns on investments (ROI).
It all boils down to what your priorities are. But considering insurance as a form of investment is often your loss. It’s the ‘feel good’ factor. For example, when buying a home loan, you can get a sense of accomplishment once you sign the contract. It’s just that.
However, that feeling goes away as soon as you get into your car and drive home. The real work begins after that, since buying a house is also an investment and it has to be taken care of. Just like life insurance will never provide any ROI or rewards, it is not a great deal either if you are planning to get rich someday.
Some common examples of unworthy insurance investment schemes:
- Mutual fund schemes and companies selling their own life insurance policies.
- Investment plans explaining how you will earn money till your death, passed on to your heirs as a part of your insurance premium.
- ‘Protection schemes’, which guarantee full or partial return on your investment if you do not die within a certain period of time.
So, what to do?
Give insurance, investment, and finance (yes) three separate rooms in your brain. They cannot be mixed together. Get insured for the necessary things, learn about the financial world, and invest in the financial markets.
What is considered an investment today might not be tomorrow. Therefore, do not rely on an investment scheme to get rich overnight. Investors who make calculating decisions manage their money smartly by diversifying their investments.
A smart investor looks for the opportunities, such as those provided by stock markets.
In simple words: insurance is what you pay to avoid the loss of something, investment is what you make to potentially earn money by providing goods/services or yielding a return.
Insurance is a roulette wheel where you bet on both red and black (Yes, the 0 is going nowhere). Investing is calculated risk. Do not buy insurance thinking that you are making an ‘investment’. It’s all about paying a certain amount of money at a certain time to get full or partial coverage against losing something that matters to you. You can win some and lose some in an investment – it’s risky but it’s also where you can make considerable returns on your money.
Its not possible to do that with insurance.
Investing in yourself
Insurance is just one of the ways to invest in yourself. Others include physical fitness, mental fitness, having a good credit score, self-development, spirituality, and the most overlooked one – financial literacy.
Knowledge is power, and knowledge is necessary to make the right move. Know what you are buying when it comes to insurance. This knowledge is power. If you know the ins and outs of insurance, then you can understand why insurance is not a good investment. You do not need to be an expert to understand this, all you have to do is ask yourself, educate yourself, and learn by yourself.
While insurance as investment is one of the worst ways to invest money, investing money in yourself is one of the smartest ways. After all, it’s you – not the money.