Insurance often confuses and more so in the sense when people club investment with insurance. Let's get this straight. Insurance is insurance and is about risk mitigation. Investment is a wealth multiplier and involves risk taking. When you think of insurance, think that if everything goes wrong do you still have the means to live a frugal but decent life. Investment comes more in the category of taking risk which might lead to your wealth getting multiplied or might wipe out the complete investment. Buying stock is a classical example of investment and hedging it is an insurance.
Let's first understand how insurance works. Let's take an example of say four people who want to take health insurance. The question is how much health insurance they should take and what is the premium that the insurance company should charge them. These are identified by two terms: cover and premium.
- Cover: It's the amount that the insurance company is bound to pay if the said event happens. For
