Insurance is one of the significant ways to mitigate and plan against any unplanned and accidental loss. It not only opens the door to a wide range of insurance against various ways to reduce the loss of money, life, property, etc. but also opens a whole avenue for the Insurance market. But why insurance as a asset or liability begs this question? Insurance is a asset or liability? And Why does insurance play such a significant role in everyone’s life in modern times?
For instance, when starting or expanding a new business or undertaking anything that involves a certain degree of risk, it is always advisable to obtain an insurance policy. Thus, insurance protects any individual against unprecedented loss that wouldn’t have been insured against in ordinary cases. According to the data of Invest India, life insurance premium collection stands at around 127 Billion USD, which speaks volumes about how insurance has been an essential part of everyone’s life.
What are the significant Terms of insurance?
To fully grasp what insurance is, it is necessary to understand its various stakeholders and related components. Generally, there are insurance policy limits, deductibles, and premiums. So, let's discuss each element in brief:
- Policy limits: Policy limits are the gross total of a policy that will be paid to an insured for any loss over a single policy term. Thus, for example, in a home insurance policy, an insured has a policy limit of 10 Lakhs to cover their personal liability coverage. Therefore, how often a person makes an insurance claim within a year will be acceptable. Their policy will pay a maximum of 10 lakhs, which the policyholder will bear if it exceeds the required amount.
- Premiums: The second insurance component is premium, which generally means a monthly, quarterly, or annual expense paid to an insurance company, depending on the policyholder's preference. The premium amount depends on various factors, such as the value of the asset insured, the risks involved, and the cash sum of coverage availed.
- Deductible: Lastly, a deductible is considered a policyholder’s probability of risk, represented in terms of a certain percentage. It is to be paid a certain amount in the case of an insurance claim where the insurer pays the coverage sum.
Why is Insurance Important?
Insurance as an asset is undoubtedly a financial method, which means that the risks associated with any type of unforeseen loss or event will be borne by a large group of people in a territory. This process not only spreads the loss over a large number of people, which makes bearing loss easy, but it also opens another door for people to come up with different kinds of ways to mitigate loss through insurance.
Secondly, Insurance creates financial security in individuals' minds, ensuring that they move into their lives and businesses risk-free and without unnecessary stress. Thus, when the possible chance of theft of goods ordinarily looms on anyone’s head, an insured individual can relatively get on with the usual business chores instead of worrying about it, which gives us a fair idea of whether insurance as an asset is so important.
Insurance Helps in Economic Stability
As discussed above, insurance works by companies pooling a large sum of money from various individuals and then using it to address any loss incurred by the insured. However, since insurance claims are generally actually smaller than the money in the insurance pool, the insurance company can further use the funds to invest in various activities and businesses to make a profit. This helps in boosting economic activity and also gives employment opportunities to individuals, which is another reason why insurance is considered a valuable asset.
Is Insurance Considered an Asset or Liability?
Before discussing if a insurance is liability or asset we should discuss what exactly are assets and liabilities. Assets are things that have an inherent value to an individual or entity. This means it can be tangible, in cash, vehicle, etc., or intangible, including investments in stocks, insurance policies, wills, etc.
Thus, the main job of an asset is to produce income or provide security in case of financial instability. For example, the most widely used asset is cash, which can be easily converted into other forms of assets or used to purchase things in ordinary ways.
On the other hand, a liability is something that a person or an entity owes to someone else, or it can mean a legal obligation to pay in the future. Thus, liability essentially means something that depreciates the value of the owner over time and can also mean attracting various financial troubles. Debt, credit, financial loss, etc., are some examples of liability.
Thus, if insurance is a asset or liability can depend on various factors, which we will discuss in detail below.
What is the Asset Value of Insurance?
Life insurance is generally considered an asset, but specifically, it also depends on a few conditions that dictate whether insurance is considered a valuable asset. For instance, permanent life insurance with a positive cash surrender value will generally be considered an asset.
But on the other hand, a term life insurance policy isn’t necessarily considered an asset. This is because term life insurance requires a person to have a terminal condition for the insurance cash value to activate, which could happen in the term specified in the insurance. Still, when it doesn’t, the value of such insurance becomes a liability.
Further, insurance also provides various tax benefits for policyholders, which means the premiums paid by an individual are easily tax deductible. This builds the value of insurance and motivates people to take it out.
What are the Benefits of insurance?
Insurance as a asset can act as a shield in divorce or bankruptcy or as collateral for various types of loans. In the case of a life insurance policy, terminally ill patients can sell their insurance for a settlement, also called a virtual settlement. This means the person’s family, which was to get the money on his/her death, can now avail the same sum for some minor deductions known as viatical settlement.
Further, in the case of insurance available for businesses, showing proof of insurance helps to increase the credibility of any business. Thus, insurance is considered a valuable asset, ensuring that your customers know that the business they are dealing with is secured and that their work is guaranteed.
Also, businesses with a vast pool of employees can benefit since employees get injured or sick which means the business has to compensate those individuals from their pocket. But in the case of insurance, it covers all the unforeseen circumstances and saves the business a lot of money, thus here also insurance as a asset plays a major role in shaping businesses too.
Conclusion
So is insurance a asset or liability? Overall, insurance can be viewed as an asset and function the same way in various conditions, removing the confusion more or less. However, some types of insurance, like term insurance, availed without a virtual settlement, can become a liability.
Thus, depending on your requirements, insurance can be tailored to cater to your needs and act as a barrier between you and your financial loss. Notwithstanding, insurance as an asset plays a crucial role in shaping and giving security to individuals, which, if considered, makes insurance an asset essential.
