Return on Insurance

Is your Insurance a waste of Money? The Truth about Premiums and Profits

Does paying an insurance premium every year feel like throwing money away, especially if you never make a claim? You are not alone. Many people think, "If I pay Rs. 20,000 in premiums for years, I should get more than that back!"

This is one of the biggest and most dangerous myths in personal finance.

Thinking of insurance as a money-making scheme is like using a life jacket as a pool floater. Sure, it floats, but you're missing its real, life-saving purpose.

Let’s clear this up: Insurance is not an investment; it's a shield.

The "What If" Scenario: Where Insurance shows its True Value

Imagine two friends, X and Y, both 35 years old and in good health.

• X believes insurance is a bad deal. "Why pay Rs. 20,000 every year for health insurance if I'm fit?" he says. "I'd rather invest that money and get returns."
• Y, on the other hand, pays his Rs. 20,000 premium yearly, seeing it as a necessary expense.

One year, both unfortunately have a medical emergency that requires a week of hospitalization. The final bill comes to Rs. 5 Lakhs.

• X's "Profit" becomes a crushing Loss: He has to drain his life savings, sell some of his investments, and maybe even borrow money to pay the bill. The financial and mental stress is immense. His financial goals are set back by years.
• Y's "Expense" becomes his Savior: Y pays a small, predictable amount (his share as per the policy) and the insurance company covers the rest of the massive, unpredictable Rs. 5 Lakh bill. His savings, investments, and financial goals remain untouched.

The Question: Who made the smarter financial choice?

Y didn't "profit" from his insurance. He didn't get more money back than he paid in over the years. Instead, he protected himself from a devastating financial blow. That protection is the real return on his insurance premium.

Think of it like this: The Seatbelt Analogy

Your car has seatbelts and airbags. You paid for them when you bought the car. Do you hope to get into an accident just to "get your money's worth" from them?

Of course not. You hope you never have to use them.

Insurance works the same way. The premium you pay is the price for having that financial seatbelt. You pay a small, known cost to avoid a huge, unknown, and potentially life-ruining cost.

Why you don’t get "Profit"

Insurance works by pooling money from thousands of people. This large pool is used to pay for the unexpected, and often catastrophic, losses of a few. Your premium is your contribution to that safety pool.

• Investment: Your money is put to work to grow and generate more money for you. It's about wealth creation.
• Insurance: Your money is pooled with others to protect against potential losses. It's about wealth protection.

Expecting a profit from insurance is like expecting your fire extinguisher to pay you dividends. That's not its job.

The Right Mindset for Financial Security

"The goal of insurance isn't to make you rich. It's to stop you from becoming poor overnight"

1. Life Insurance: It’s not for you; it's for the people you love. It ensures that if something happens to you, your family can continue to live their lives without facing a financial crisis.
2. Health Insurance: It protects your life's savings from being wiped out by a single medical emergency.
3. Vehicle & Home Insurance: It ensures you don't have to start from scratch if your most valuable assets are damaged or stolen.

Don't cancel your policy because you didn't "use" it this year. Instead, be thankful you didn't have to. The peace of mind that comes from knowing you're protected is the best return you can ask for.

"The ROI on unused insurance isn't zero - it's infinite, because you can't put a price on the disasters that didn't happen."

The Bottom Line: Use investments to build your wealth. Use insurance to protect it. They are two different tools for two different jobs, and a smart financial plan needs both.

Regards,

Honvest Team.