Difference Between Life Insurance and General Insurance – Forbes

Insurance is an essential element of anyone’s financial planning. It helps you in dealing with life’s uncertainties and cushions financial shocks. Acquiring different types of insurance policies that cover varied risks, provides financial support at the time of an emergency. 

Generally, when you purchase an insurance policy, you pay a certain predetermined amount as a premium to the insurance provider. In return, the insurance company offers compensation in case the insured event occurs. But many of us have a slight difficulty differentiating the various types of insurance policies available in the market. 

Broadly speaking, there are two distinct categories of insurance – life and general insurance. Here’s what each type of insurance offers, its application, and its benefits. 

What is Life Insurance?

As the name suggests, the insurance policy covers your life. A life insurance policy is a type of contract between the policyholder (you) and your insurance provider. With this contract, the insurance company pledges to pay a sum assured to your nominee if you meet with an untimely demise. The insurance company can also pay the sum assured to you after the maturity date of your life insurance policy. 

Such payout is in exchange for the payments made towards the insurance cover, also known as premium. The policy offers monetary benefits to your family in difficult times. Such type of insurance provides much-needed financial security to your loved ones and is also a sound investment tool. 

Types of Life Insurance

A term insurance covers a person for a fixed period or a term. In case the policyholder passes away during the term of the policy the family members or the policyholder’s nominee can lodge a claim with the insurance provider for the policy proceeds. With growing life expectancy, many life insurance companies offer term plans up to 99 years of age. 

Unlike the term plan, the whole life cover is not restricted to a preset term but provides insurance coverage for life, i.e., as long as the insured is alive. Such a plan only matures when the insured person passes away. 

After their death, the family members/nominees can file a claim for policy benefits. One thing to note here is that the nominee cannot file for a policy claim during the lifetime of the policy holder. 

Unit-linked Insurance Plans 

These plans are typically called ULIPs. The objective of such covers is to offer growth of money along with life coverage. When you purchase unit-linked insurance plans, it provides the benefit of investments and insurance in a single policy. The policy premium is divided into two parts. One part is used for providing life cover, and the other is invested into the financial markets, similar to mutual funds. 

Endowment plan is a perfect blend of insurance cover and investment. With an endowment plan, the nominees can claim the sum assured if the policyholder passes away during the term of the policy. On the other hand, if the policy holder survives the term, they get to claim survival benefits as mentioned in the policy’s terms and conditions. 

An endowment plan is also unique in terms of coverage and investment. The insurance company reserves some percentage of the policy premium and the sum assured while it invests the remaining share. Once the policy matures, the policyholder can claim the sum assured as well as the incentives generated through investments. 

The money back policy operates just like an endowment policy. However, the key difference is the policyholder does not need to wait for the coverage to mature to avail returns. Money back insurance plans give returns after preset intervals during the term of the policy. Such a period can be five years or ten years post the inception of the policy and depending upon other terms and conditions. 

Such insurance policy is used for covering the expenses arising from an acute or life-threatening disease. The critical illness insurance policy provides for the costs of diagnosis, hospitalization, and treatment of the said disease. 

The insured can claim a lump sum amount when diagnosed with such a critical illness to cover their expenses. The remaining amount can be claimed after the policy matures, as per the policy terms. 

What is General Insurance?

It is a special type of insurance cover which aims to protect your many assets – the vehicle you drive (motor insurance), the home you live in (home insurance), or protects you from financial shocks due to illness led hospitalization (health insurance). General insurance compensates you for the expenses incurred because of the liabilities related to your possessions such as car, travel, home, or health.

Types of General Insurance

In this segment, we examine the different types of general insurance covers that are available in the market.

A commonly purchased general insurance product, here the policy covers insured vehicles and offers protection against damages incurred by theft, riots, accidents, natural calamities, terrorist attacks etc. There are two types of motor insurance:

Comprehensive insurance: The policy offers broad coverage covering both the parties involved in an accident i.e., own damage and third party. Third-party insurance: The policy only covers the third party involved in an accident. Such policies generally charge a lower premium than the comprehensive cover. 

One of the most common forms of general insurance cover. The health insurance policy offers protection against medical and hospitalization expenses. Today, you can avail a variety of health insurance coverages that provide protection against other health-related emergencies. 

As a policyholder, you can choose between different types of coverage for certain disorders such as cancer or cardiac disorders, accidents, etc. You can also select an individual or family plan that offers health coverage for all your family members.

The policy aims to cover your home from natural calamities such as floods or earthquakes and man-made threats like theft, riots etc. You can lodge a claim with your insurance provider when you face such an emergency. After conducting the due diligence, the company will settle the claim. 

What is the Difference Between Life Insurance and General Insurance?

We know that each type of insurance has a different purpose and covers different aspects of our lives. While life insurance only concerns your lifespan and the financial security of your loved ones in your absence, general insurance aims to secure vital assets, including health, home, and vehicle, among others. 

One of the most significant differences between the two types is the policy term. Typically, life insurance covers are long term plans. Typically, a life insurance policy has a duration of 15 to 20 years. On the other hand, general insurance policies are short-term plans that get generally renewed annually depending upon the earlier policy opted. 

You need to pay a lump sum premium or in regular intervals for life insurance policies. These recurring intervals can be monthly, quarterly, half-yearly, or annually. 

In contrast, you pay a one-time premium for general insurance when you buy the policy or at the time of renewal. Some exceptions include travel insurance wherein you pay a premium only purchasing a cover for a particular trip. 

Typically, the nominee receives the sum assured when the policyholder passes away in life insurance policies. The policyholder can instead receive the proceeds once the policy matures. For money back and endowment plans, the insurance company also gives interest generated on the investments. For a critical illness cover, the policyholder can avail of insurance benefits after the diagnosis of the disorder or health conditions included in the policy terms. 

While filing a general insurance policy claim, the company considers a specific event. For instance, the policyholder can only claim health insurance after diagnosis of a disease, hospitalization, or some other medical emergency, depending upon the policy. Similarly, travel, home, or vehicle insurance can be claimed only after some form of damage or loss because of an accident or specific event. 

Value of the Insurance Policy 

Policyholders generally determine their life insurance cover value. You can choose the sum assured depending on your requirements and the ability to pay regular premiums. This sum assured is then paid back to your nominee in your absence or to you after the policy matures. 

On the contrary, the value of a general insurance policy is influenced by an asset’s value. Thus, the insurance company determines the value by different methods based on the type of policy Indemnity-based or benefit-based.

Bottom Line

We live in a world full of uncertainties. Insurance helps you tackle these uncertainties by providing financial help when you need it most. We must understand that each type of insurance – general and life – is designed to serve your needs to live a stress-free life. 

The key here is to understand their differences and procure the right insurance policy that can offer maximum cover and benefits. Always consult your qualified financial advisor before taking investment-related decisions.