What is Insurance?
Insurance is a financial product one "buys" to cover various risks he faces in his life, including risk to his own life, his body and his assets. The term "buy" implies that this is an expense and not an investment as widely (mis)understood.
Why countries like India provide tax benefits for Insurance products?
Insurance is in a way, social security. Developed countries collect a small amount as tax for social security. But this cannot be mandated in poorer countries as not everyone will be able to pay that. Hence it remains optional in the form of insurance. If 100 people subscribe to a pure risk life insurance policy (more about this later) for 20 years and one of those guys dies at the fifth year, the insurance company pays a lumpsum to the family of the deceased from the premiums paid by 100 people. Hence every other person in the group of 100 people helped the family of the deceased, which can be considered in a way as charity. The country is bound to help the citizens who spend their hard earned money to cover their risks, besides helping others in times of adversity. Hence the country waives the tax on the "expenditure" towards insurance.
I get back my money spent on Insurance, sometimes including the returns in terms of bonuses. So is it not wrong to say that it is charity?
Well, a pure risk insurance policy does not return you anything back. Hence it falls inline with charity. However Endowment and Moneyback policies do return your money with bonuses. But if you check the percentage of returns on your money it will be less than 3-4% p.a. in most cases. The rest of the yield, goes towards your insurance expenses. A pure risk life insurance policy for 500,000 quid for a period of 20 years for a healthy 20 year old individual will be around a 1000 bucks an year. However an endowment policy on similar conditions may cost 10,000 bucks a year. That explains.
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