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Insurance

Insurance Intro Nine Steps 1.What it IS 2. What it ISN'T 3. Is it a Ripoff? 4. The Right Price 5. Your Agent 6. Scam of the Century? 7. Life Sentences 8. What To Do 9. Overlooked Neccessity

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What Insurance Isn't

Sometimes insurance agents promise insurance that does not just insure you, but actually offers you an investment opportunity, as well. Be careful. If the word 'investment' is used loosely enough, it can describe anything from buying a toupee to getting your oil changed.

When we talk about investing as it relates to purchasing stocks, bonds, mutual funds or other financial instruments, we are talking about something very different from the garden-variety type of investing. Investing involves putting money into some sort of financial instrument with the sole purpose of creating wealth. Although certainly a toupee is an investment in your appearance, or an oil change an investment in keeping your car going, neither directly creates personal wealth.

With this understanding of what an investment is, we can clean up the major misconception about insurance. Probably the most important thing to understand about insurance is what it is not -- insurance is not in any way, shape or form an investment. No matter how much an insurance agent is incentivized by fat commissions to call insurance an investment, insurance fails to meet the litmus test.

Although some types of insurance do actually appreciate in value over time, the principal reason that you buy insurance is to protect against the financial consequences of a loss -- not to create wealth. In fact, almost all kinds of insurance that do create wealth are poor performers relative to simple, straightforward investment options like S&P 500 Index mutual funds or the Dow Dividend Approach.

We'll talk more about this in our discussion of life insurance -- a must-read for all Fools.

--Randy Befumo

Next: Who should you watch most closely -- your mechanic or insurance agent?

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