Insurance is not investment: Expert explains why mixing MF SIPs, term plans can backfire

For many Indian households, insurance and investment are still seen through the same lens. Agents often pitch insurance policies as wealth-building tools, and buyers assume they are “killing two birds with one stone” — getting both protection and returns. But experts say this misconception can be financially damaging in the long run. Insurance and investment serve entirely different purposes, and mixing them often leads to weak protection and disappointing returns.

Insurance is fundamentally a risk management tool. It provides financial security during life’s most uncertain moments — death, disability, accidents, or critical illnesses. The payout ensures that a family’s financial stability is not compromised even if income stops. Investments, on the other hand, are designed to grow wealth and help individuals achieve long-term goals such as buying a house, funding education, or building a retirement corpus.

CA Nitin Kaushik, in a recent post on X, summed it up simply: “Insurance ≠ Investment. Stop mixing them.”

Kaushik recalled an incident with a client from Delhi who argued, “Insurance is better than mutual funds. No GST — instant 18% saving. Profit, right?” His reply: “Not really. Insurance protects your income. It replaces it if something happens. Investments like mutual funds or equities grow your money and fund your goals. Mixing the two equals weak protection and poor returns.”

He also offered a rule of thumb:

Buy term insurance for low-cost, high-coverage protection.

Invest separately in SIPs, equity, gold, or real estate for growth.

“First protect your wealth. Then grow it. Both matter — but for different reasons,” Kaushik emphasised.

The confusion is fueled by hybrid products such as endowment plans and ULIPs (Unit-Linked Insurance Plans). While marketed as offering “insurance plus investment,” these plans typically deliver neither adequately. They provide limited coverage compared to a term plan and offer subpar returns compared to equity or mutual funds. As a result, buyers are often left underinsured and underinvested, jeopardizing both their family’s security and their long-term goals.

Financial planners recommend keeping insurance and investment separate buckets. Pure protection products like term insurance, health insurance, and personal accident policies should form the foundation of risk management. For wealth creation, one should look at instruments like equities, mutual funds, fixed income products, or gold.

The key is to view insurance as a safety net, not a profit tool. As Kaushik explained, “Confusing the two often results in disappointment. The purpose of insurance is to secure your family’s future in your absence. The purpose of investments is to create wealth over time. When both are handled separately, you achieve true financial balance.”

The bottom line: Resist the temptation to combine insurance and investment into one product. A term plan may not give you returns, but it gives peace of mind. A SIP may not protect your family in your absence, but it will build wealth steadily. Together, they work best — but only if kept apart.