The concept of insurance is very simple to understand. You pay a monthly or yearly fee to the insurance company to insure your life, health, vehicle, property etc for a certain period. In return, the insurer pays for the financial damages in case of any harm to the insured person or object. So you are transferring the risk of a financial loss you might experience due to life’s uncertainties to an insurance company for a small fee. For example, if you meet with a car accident and need to be hospitalized. Your health insurance policy will cover the medical costs for hospitalization. And, your car insurance will pay for the damages to your car. Meanwhile, if you die during the accident, your family will receive a lump sum amount for your term insurance.

Depending on the type of life insurance policy and how it is used, permanent life insurance can be considered a financial asset because of its ability to build cash value or be converted into cash. Simply put, most permanent life insurance policies have the ability to build cash value over time.