Insurance Types: Life and General Insurance - Explained Guide
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Insurance Types: Life and General Insurance - Explained Guide

  • Highlights

  • Life insurance is a form of investment offering savings

  • General insurance covers non-life assets offering no savings

  • Life insurance is a long-term contract with monthly premiums

  • General insurance is an annual contract with a lumpsum premium

The cornerstone of financial planning, insurance hedges you, your dependents and your assets against financial losses incurred in case of an unfortunate event. The concept of insurance is pretty simple. You pay a certain amount called the premium to the insurer who in turn offers a coverage and pays a pre-determined amount for the damages suffered.

However, depending on what your insurance covers, they are classified as life and general. In this article, we will explain both these types of insurance and their various aspects.

What is life insurance?

As the name suggests, life insurance covers your life. In case of policyholder’s premature demise within the policy term, the insurance company pays the sum assured to the nominee. One of the most essential financial instruments, life insurance helps your family to stay financially independent, square off liabilities taken in the form of loans, maintain the lifestyle provided, and keep essential goals on track.

Types of life insurance

1. Term life insurance:
Term insurance is the simplest form of life insurance available in the market. A pure protection plan, a term insurance offers a large coverage at an affordable premium. A 30-year-old non-smoking male can opt for a term plan offering a cover of Rs.1 crore for a policy term of 30 years by paying a nominal premium of a little over Rs.8,000 per annum. Term plan gives you the flexibility to choose a sum assured 15-20 times of your annual income.

It pays your nominee the sum assured in case of your demise within the policy term. The insurance proceeds received help your family to meet daily expenses and pay off debts. Note that pure term plans have no maturity benefits. It means, in case you survive the policy term, you don’t get these benefits.

However, of late insurers have come up with the return of premium term insurance plans which return all the premiums paid in case you survive the policy term. But these plans are slightly more expensive than pure term plans.

2. Endowment plans
Weaving insurance and investment in a single product, endowment plans offer life cover as well as build a corpus for essential life goals. A certain portion of the premium goes towards the sum assured, while the other portion is invested in low-risk avenues. In case of your demise during the policy term, your nominee gets the sum assured.

In case you survive the policy term, you get the sum assured as maturity amount along with the accumulated bonuses. Thus, endowment plans fulfil the dual needs of insurance and investment.

3. Money back policies
Money back policies are similar to endowment plans, except that they pay a certain amount at pre-defined intervals during the policy term. For instance, a money-back policy for a term of 15 years, may pay a certain amount at the end of 5th and 10th year of the policy term. On policy maturity, it pays the maturity benefits along with the accumulated bonuses.

4. Unit linked insurance plans (ULIPs)
Combining insurance and investment in a single product, ULIPs offer life protection as well as the opportunity for capital appreciation by investing in various funds of varying degrees of risk. Just like endowment policies, in ULIPs a certain portion of the premium goes in providing life cover, while the other portion is invested in markets to earn returns.

Additional Read: Step-By-Step Guide To Choosing A ULIP

Every ULIP has underlying funds belonging to different asset classes such as equities, debt and hybrid where it invests to generate returns. ULIPs offer partial withdrawal facility after the end of the lock-in period (5 years) and also offer switching facility whereby you can switch from one fund to another. This facility comes in handy when you are nearing your goal, wherein you can switch from an aggressive fund to a debt fund.

5. Whole life insurance
As the name suggests, a whole life insurance offers you coverage for your entire life. The policy term for whole life insurance plans extend up to 100 years and as long as the premiums are paid, the benefits of the policy are kept intact.

If you, the policyholder, survive the policy term, you get maturity benefits. If you want to remain insured throughout your life, whole life insurance plans are a good choice to make.

What is general insurance?

General insurance covers non-life assets - such as your home, vehicle, health, travel – from floods, fire, thefts, accidents and man-made disasters.

Types of general insurance

1. Health insurance
an essential risk mitigating tool, health insurance prevents out-of-pocket expenses while dealing with a medical emergency. A general health insurance plan is an indemnity plan that pays for hospitalisation expenses up to the sum insured. While you can avail a standalone health policy, family floater plans provide coverage to all the members of your family.

Additional Read: Health Insurance Plans Available In India

On the other hand, critical illness plans are fixed-benefit plans which provide a lump sum upon diagnosis of a critical ailment, taking care of pre- and post-hospitalisation costs. These plans help take care of astronomical costs associated with the treatment of critical ailments.

2. Motor insurance
Motor insurance covers your vehicles against accidents, damage, theft, vandalism, and so on. This form of insurance comes in two forms – comprehensive and third-party. A comprehensive motor insurance policy provides a 360-degree cushion to your vehicle against damages caused due to flood, fire, riot, etc. Along with this, it also offers you the rider, a personal accident coverage along with third-party liability.

On the other hand, a third-party motor insurance takes care of the damages suffered by a third-party in case of an accident caused by your vehicle. It won’t cover any damages to your vehicle. As per the Motor Vehicles Act, 1988, it’s mandatory for every vehicle plying on the road to have a third-party insurance.

Additional Read: 5 Best Car Insurance Plans To Choose From

3. Home insurance
As the name suggests, a home insurance policy protects your home and its belongings from the damages suffered due to man-made or natural disasters. Some home insurance policies also provide coverage for temporary living expenses in case you are living on rent, due to your home undergoing renovation.

Additional Read: Looking For a Home Insurance Policy? Choose From These 7 Options

4. Travel insurance
In case you are travelling abroad, a travel insurance policy protects you against losses suffered due to loss of baggage, delays in flight and trip cancellation. In some cases, if you are hospitalised while travelling, a travel insurance may also offer cashless hospitalisation.

Features of a Life Insurance Policy

Difference between life and general insurance

1. Meaning and Coverage
Life insurance covers your life and also has provisions to provide a savings and investment avenue. Savings here mean the benefit on maturity. For example, if the policyholder outlives the policy period, he or she can get back the premium paid over the years. General insurance is a contract of indemnity covering non-life assets. It is a promise to make good on your losses, but with no savings or investment avenue i.e. if the claim is not made, no part of the premium can be got back.

2. Purpose
Life insurance gives a payout in case the policyholder dies, whereas in case of a general insurance, payouts is made in the event of an unexpected loss such as an accident or a theft or a sudden liability.

3. Term of contract and payment
Life insurance is a long-term contract and requires you to pay the premiums in monthly installments. General insurance meanwhile is a short-term contract, to be renewed every year, and requires you to pay the entire premium on renewal.

4. Insurable interest
With life insurance, the policyholder must be present during the issuing of a life insurance policy. With general insurance however, the policyholder must be present during the time of contract and at the time of loss.

5. Payment of claim
In case of life insurance, the insurable amount is paid on the occurrence of the event or on maturity of the policy. For general insurance, losses are reimbursed when the uncertain event occurs.

6. Policy value
Life insurance can be done for any value based on the premium the policy holder willing to pay. In case of general insurance, the amount payable is restricted to the liability incurred or actual loss suffered, irrespective of the policy amount.

The table below summarises the major differences between life and general insurance:

Parameters Life insurance General insurance
Meaning Covers life Covers non-life assets
Contract term Long-contract that requires paying premiums for several years Generally, annual contracts which need to be renewed every year
Payment of claim Is payable in case of the death of the policyholder during the policy term or on policy maturity Reimbursed during an eventuality
Savings component Present Absent

Both life and general insurance are needed to comprehensively cover all aspects of your life.

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