Insurance and investments are often confusing, they seem similar, but in reality, they are drastically different. If you’re hoping to get your finances sorted and become a financially savvy individual, it’s a smart idea to take advantage of both. What exactly are the differences between insurance and investments, and why are both important? Here’s a quick overview.
Defining an Investment
An investment is an asset acquired with the sole purpose of making money from that asset. Either the asset appreciates over time, essentially growing your initial investment, or it depreciates, causing you to lose money. When, or if you decide to sell that asset, you will either generate a profit or a loss. Investments also carry an inherent risk. You cannot say for certain whether you will generate a profit, but you also cannot guarantee you won’t suffer a loss. If you purchase property such as land, a house, jewelry, etc. in the hope that it will appreciate over time, you can ensure that property against damage or theft, but again, you cannot guarantee it will not depreciate. Many people mistakenly believe insurance policies are an investment, when in fact, they’re something entirely different. Generally, an insurance policy does not appreciate over time, so while you receive cash from that policy when you file a claim, it is not considered an investment.
How Insurance Differs
Insurance differs from investments in that you generally do not purchase an insurance policy with the intent of making a profit from that policy. Instead, insurance is a protective measure designed to issue cash to the policy owner when the need arises. You purchase insurance as a form of loss protection; to protect yourself from financial losses involving your existing property. With $528 billion in damages resulting from vehicle crashes, it’s no surprise that we look for ways to mitigate our losses when tragedy strikes. Unlike an investment, most insurance policies are also not considered assets because you don’t technically own them, and you cannot sell them. The exceptions to this rule are whole life insurance policies and insurance annuities. For all intents and purposes, however, you cannot sell an insurance policy. Once you cease paying the premiums, you no longer have loss protection.
Having Both is a Smart Financial Choice
When it comes to your finances, it will behoove you to have both investments and insurance policies. If you purchase a home as an investment, you’ll no doubt purchase homeowner’s insurance to protect your property. If you purchase a vehicle, you’ll need to protect yourself from financial loss in the event of a collision, vandalism or weather-related damages. Insuring your existing tangible assets is always a smart financial decision because it protects you from financial liability, thereby protecting your monetary savings. Investments, on the other hand, are also intelligent financial decisions because they can help your existing finances grow. Rather than allowing your savings to languish in a low-interest savings account, you can put your existing money to work for you.
A knowledgeable advisor can guide you toward making intelligent investments likely to appreciate over time, allowing you to grow your wealth significantly.