Insurance is an essential part of anyone’s financial planning. It helps you cope with the ups and downs of life and cushion financial shocks. Acquiring different types of insurance policies that cover various risks, provides financial support at the time of an emergency.
Generally, when you take out an insurance policy, you pay a certain predetermined amount as a premium to the insurer. In return, the insurance company offers compensation in the event of the occurrence of the insured event. But many of us have a slight difficulty in differentiating between the different types of insurance policies available in the market.
Broadly speaking, there are two distinct categories of insurance – life insurance and general insurance. Here’s what each type of insurance offers, its application and 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 insurer. With this contract, the insurance company undertakes to pay an insured sum to your nominee in the event of premature death. The insurance company may also pay you the sum insured after the expiry date of your life insurance policy.
This payment is in exchange for the payments made for the insurance coverage, also known as the premium. The policy provides monetary benefits to your family in difficult times. This type of insurance provides much-needed financial security for your loved ones and is also a good investment tool.
Types of life insurance
Term insurance covers a person for a fixed term or term. In the event that the insured dies during the term of the policy, the family members or agent of the insured may file a claim with the insurer for the proceeds of the policy. With the increase in life expectancy, many life insurance companies offer term contracts up to 99 years.
Unlike the term plan, whole life coverage is not limited to a pre-defined duration but provides lifelong insurance coverage, i.e. as long as the insured is alive. Such a plan does not expire until the death of the insured.
After death, family/named members can file a claim for policy benefits. One thing to note here is that the applicant cannot file a claim during the lifetime of the policyholder.
- Unit-linked insurance plans
These plans are generally called ULIP. The objective of these covers is to provide money growth with life cover. When you purchase unit-linked insurance plans, it allows you to benefit from investments and insurance in one policy. The policy premium is divided into two parts. Some is used to provide life cover and some is invested in financial markets, like mutual funds.
The endowment plan is a perfect blend of insurance coverage and investment. With an endowment plan, applicants can claim the sum assured if the policyholder dies during the term of the policy. On the other hand, if the policyholder survives the term, he can claim survivor benefits as stated in the terms and conditions of the policy.
An endowment plan is also unique in coverage and investment. The insurance company reserves a certain percentage of the policy premium and the sum insured while it invests the remaining part. Once the contract has expired, the policyholder can claim the sum insured as well as the incentives generated by the investments.
The refund policy works like an endowment policy. However, the main difference is that the policyholder does not need to wait for the cover to expire to benefit from the returns. Reimbursement insurance plans give returns after predefined intervals during the term of the policy. Such period may be five years or ten years after the start of the policy and according to other terms and conditions.
This insurance policy is used to cover expenses arising from an acute or life-threatening illness. The critical illness insurance policy covers the costs of diagnosis, hospitalization and treatment of said illness.
The insured can claim a lump sum when he receives a diagnosis of such a serious illness to cover his expenses. The remaining amount can be claimed after the expiry of the policy, in accordance with the terms of the policy.
What is general insurance?
It is a special type of insurance coverage that aims to protect your many assets – the vehicle you drive (car insurance), the house you live in (home insurance), or protects you from financial shocks due hospitalization due to illness (health insurance) . General insurance compensates you for expenses incurred due to liabilities related to your property such as car, travel, home or health.
Types of general insurance
In this segment, we look at the different types of general insurance coverage available in the market.
A commonly purchased general insurance product, the policy here covers the insured vehicles and provides protection against damage caused by theft, riots, accidents, natural disasters, terrorist attacks, etc. There are two types of auto insurance:
- Comprehensive insurance: The policy offers broad coverage covering both the parties involved in an accident, i.e. own damages and third parties.
- Liability insurance: The policy only covers the third party involved in an accident. These policies typically charge a lower premium than full coverage.
One of the most common forms of general insurance coverage. The health insurance policy provides protection against medical expenses and hospitalization. Today, you can benefit from a variety of health insurance coverages that provide protection against other health-related emergencies.
As an insured, you can choose between different covers for certain pathologies such as cancer or heart disease, accidents, etc. You can also opt for an individual or family formula that offers health coverage for all members of your family.
The policy aims to cover your home against natural disasters such as floods or earthquakes and man-made threats such as theft, riots, etc. You can file a claim with your insurer when you face such an emergency. After performing 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 important differences between the two types is the duration of the policy. Typically, life insurance coverages are long-term plans. Typically, a life insurance policy has a term of 15 to 20 years. On the other hand, general insurance policies are short-term plans that are usually renewed every year based on the previously chosen policy.
You have to pay a lump sum premium or at regular intervals for life insurance policies. These recurring intervals can be monthly, quarterly, semi-annually or annually.
On the other hand, you pay a single premium for general insurance when you buy the policy or at the time of renewal. Some exceptions include travel insurance where you only pay a premium by purchasing coverage for a particular trip.
Typically, the applicant receives the sum assured when the policyholder dies in life insurance policies. Instead, the policyholder can receive the proceeds once the policy has matured. For reimbursement and endowment plans, the insurance company also gives the interest generated on the investments. For critical illness cover, the policyholder may receive insurance benefits after diagnosis of the disorder or health condition included in the terms of the policy.
When filing a general insurance policy claim, the company considers a specific event. For example, the policyholder can only apply for health insurance after diagnosis of an illness, hospitalization or other medical emergency, depending on the policy. Similarly, travel, home or vehicle insurance can only be claimed after some form of damage or loss due to a specific accident or event.
- Insurance policy value
Policyholders generally determine the value of their life insurance coverage. You can choose the sum insured based on your needs and your ability to pay regular premiums. This sum insured is then reimbursed to your agent in your absence or to you after the expiry of the policy.
On the contrary, the value of a general insurance policy is influenced by the value of an asset. Thus, the insurance company determines the value by different methods depending on the type of policy Indemnity-based or Benefit-based.
We live in a world full of uncertainties. Insurance helps you cope with these uncertainties by providing financial assistance when you need it most. We need to understand that each type of insurance – general and life – is designed to meet your needs to live a stress-free life.
The key here is to understand their differences and get the right insurance policy that can provide maximum coverage and benefits. Always consult your qualified financial adviser before making investment decisions.