By Alevin Chan
Insurance exists in that weird in-between space most famously occupied by Schrodinger's cat. The average person would be hard pressed to answer the question, "Is insurance an expense or an asset?"
That's because much like the popular (if misunderstood) thought experiment that launched a million drunken debates, insurance can occupy that quantum state where it is both an expense and an asset.
But unlike poor Mittens (whose fate pretty much depends on whether you've gotten over your ex) there are definite situations where insurance is an asset.
Insurance Becomes an Asset When The Plan Matures
Let's start with the most straightforward example.
When your education endowment plan (finally) matures, and you don't have to pay any more premiums, you'll automatically be credited a large sum of money. At that moment, you receive however many thousands your insurer promised.
It is only from that point onwards, and not a moment sooner, that your endowment plan acts as an asset.
Before maturity, your endowment plan is not considered an asset. Why? Because the surrender value of your policy is likely less than the premiums you have paid to date. This means that terminating your policy and opting for the surrender value makes you take a net loss.
It is the same with all your life insurance policies. As long as the surrender value is less than the paid up premiums, your policies cannot be considered an asset. This means that for the majority of insurance plans, they can't really be considered an asset until they mature.
And, provided they actually give you a profit by then.
Insurance Can Be an Asset When The Risk Exists
Now we go to the other side of the coin.
Despite the explanation above, insurance policies don't always have to wait until maturity to be considered an asset. Insurance can act as an asset when the risk exists and is experienced.
Insurance is all about transferring your risk to another party. Unfortunately, because we don't live in a comic book, we are unable to magically divert accidents, illnesses or death to someone like Deadpool, where he'll just heal it off while pocketing your money with a mean wisecrack.
Because there are very real risks that we face daily, simply having insurance coverage acts as an asset. And to be precise, insurance acts as an asset when the risk is experienced and the coverage is activated (i.e., you make a claim and successfully receive a payout).
But don't the usual incidents that life insurance covers also cause you to lose out on future earnings? Yes, they mostly do. But isn't having a payout to help fund your expenses better than not having one?
Insurance Is an Asset When The Fallout Is Financially Ruinous
Here's another way of considering the question – this time, purely from a pragmatic standpoint.
Say you have a million dollars stashed away. If the untoward should happen to you (maybe you get Force-choked to death by Darth Vader, for example), your dependents can comfortably get by using this S$1 million. Should you still buy insurance then?
In a situation like this, insurance can be considered purely optional. Buying insurance will help provide your dependents with even more money, which they will receive in addition to the S$1 million you left them.
But, since you have enough funds to preserve your loved one's quality of life, insurance charges are simply expenses you're taking on. Might the money spent on premiums be better used investing in the market?
Don't get us wrong – we're not saying that the rich have no need for insurance. But when you have enough funds to withstand the fallout, your need for insurance coverage becomes slightly less urgent.
The bottom line? When the fallout of whatever risk you are covering will be financially ruinous, insurance falls firmly in the 'asset' category.
Still not sure whether you should buy insurance or not? Try speaking with a trained financial adviser to get their perspective. Of course, they will put up a spirited argument why insurance is an asset, so pit your own reasoning against theirs to help you decide.
This article first appeared on SingSaver.com.sg.