Insurance – is it an investment or an expense?

Insurance – is it an investment or an expense?


First, let’s take into account the following definitions:

Expense: an outflow of money from which no future benefit is expected.
Investment: an outflow of money that aims to make a profit or gain. In other words, it aims at the possibility of money-making in the future.

With the definitions listed above, it is better understood that insurance is an investment because it is materialized when the policyholder receives compensation to mitigate its economic loss, ie receives something that is beneficial in the future. In this regard, insurance should be considered a preventive action against possible adverse events that may harm their personal or financial interests.

People who see insurance as an expense is the one that believes that the occurrence of any event that could potentially change their current situation significantly, is very unlikely. Furthermore, there is also a large group of people who have a total lack of information concerning insurance and empirically define it as an expense.

At the risk of an unforeseen event happening, it is the insurance that provides tranquility to the beneficiary because the risk is assumed by third parties (insurers). It’s not the same to spend all your capital to repair a loss caused by a fluke, like the earthquake suffered in April, than making a premium payment-which is a relatively less amount of money, in  exchange of an indemnity that minimizes that loss. The insurance will guarantee your business’ permanence in time; in fact, their main objective is to ensure long life to companies against any eventuality.

Undoubtedly, insurance characteristics are most associated with the concept of investment rather than an expense- something that should be informed to the public to foster a culture of insurance in Ecuador.