Life insurance and general insurance are two types of insurance products that serve different purposes and cover different aspects of risk. Life insurance focuses on providing financial security to beneficiaries in case of the insured’s death or disability, while general insurance covers risks related to property, liability, health etc. The terms, benefits and coverage of these two types of insurance cater to different aspects of individuals’ and businesses’ risk management needs. Let us look at them broadly.
What is Life Insurance?
Life insurance is a contract between an individual (the policyholder) and an insurance company, where the insurance company agrees to pay out a predetermined sum of money to the designated beneficiaries upon the death of the insured person. In exchange for this financial protection, the policyholder pays regular premiums to the insurance company.
In other words, life insurance policy is an agreement between the insurance company and the policy buyer, wherein the policyholder needs to pay a certain amount of premiums per month to the insurance company in return for the desired coverage for a fixed policy tenure. The life insurance policy provides risk coverage in the form of a death benefit or maturity benefit to the family of the life assured in case of any eventuality during the policy tenure.
Life insurance serves multiple purposes, such as providing financial security to loved ones after the policyholder’s death, covering outstanding debts, funding education for children, or even leaving a charitable donation. The choice of the right type and amount of life insurance depends on individual circumstances, financial goals, and risk tolerance.
Types of life insurance
- Term Life Insurance: Provides coverage for a specific term, such as 10, 20, or 30 years. If the insured person dies within the term, the death benefit is paid to the beneficiaries. If the term ends without a claim, the coverage typically expires.
- Whole Life Insurance: Offers lifetime coverage and includes a savings or investment component called the cash value. Premiums for whole life insurance are generally higher than term life insurance, but the policy builds cash value over time.
- Universal Life Insurance: Similar to whole life insurance but provides more flexibility in premium payments and death benefit amounts.
- Variable Life Insurance: Allows the policyholder to invest the cash value portion in various investment options, with the potential for greater returns but also higher risks.
- Variable Universal Life Insurance: Combines the flexibility of universal life insurance with the investment options of variable life insurance.
What is General Insurance?
General insurance, also known as non-life insurance, is an insurance that provides coverage for many risks and events that are not related to an individual’s life. Unlike life insurance, which primarily covers the risk of death, general insurance covers assets and liabilities that individuals, businesses and organizations may have. The goal of this type of insurance is to offer financial protection against unexpected events that can result in financial losses.
In other words, 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.
In the event of a covered loss or event, the policyholder can file a claim with the insurance company. The insurance company will assess the claim, and if it meets the terms of the policy, a payout will be made to cover the financial losses or damages incurred.
General insurance policies have specific terms and conditions outlined in the insurance contract. These terms specify what is covered, what is excluded, the policy limits, deductibles (the amount the policyholder must pay before the insurance kicks in), and any other relevant details.
General insurance policies are usually issued for a specific period, often one year. Policyholders have the option to renew their policies at the end of the term. Premiums may change upon renewal based on factors like claims history, changes in the insured property’s value, and other considerations.
Types of general insurance
- Property Insurance: Protects physical assets such as homes, buildings, vehicles, and belongings against risks like fire, theft, vandalism, and natural disasters.
- Liability Insurance: Covers legal obligations to pay for damages or injuries caused to third parties. Examples include public liability insurance for businesses and personal liability insurance for individuals.
- Health Insurance: Provides coverage for medical expenses and healthcare services, including hospitalization, surgeries, and preventive care.
- Auto Insurance: Covers vehicles against accidents, theft, and other damages. It can also provide liability coverage in case the insured causes harm to others while driving.
- Travel Insurance: Offers coverage for travel-related risks such as trip cancellations, medical emergencies abroad, lost luggage, and more.
- Business Insurance: Includes various types of coverage for businesses, such as property insurance, liability insurance, business interruption insurance, and more.
- Marine Insurance: Covers risks related to marine transportation, including cargo damage, ship damage, and liability for maritime activities.
General vs Life Insurance: Key Difference
Nature of Coverage
- Life Insurance: It provides coverage for the life of the insured person. It pays out a death benefit to the beneficiary upon the insured’s death, helping to provide financial support to the family or dependents.
- General Insurance: It covers a wide range of risks other than those related to life. It includes property, health, travel, auto, liability etc.
Benefit Type
- Life Insurance: The primary benefit is the death benefit paid out to beneficiaries upon the insured’s death.
- General Insurance: The benefits vary depending on the type of general insurance. It could include reimbursement for medical expenses, repair or replacement of property, liability coverage etc.
Premium Payment
- Life Insurance: Premiums are generally paid over the policy’s term, which can be long-term (e.g., whole life or term life).
- General Insurance: Premiums are typically paid annually or periodically based on the policy term, which is usually shorter than that of life insurance policies.
Policy Duration
- Life Insurance: Policies can have a long duration, covering the entire life of the insured (whole life) or a specific period (term life).
- General Insurance: Policies have shorter durations, often ranging from one year to a few years.
Risk Covered
- Life Insurance: Covers the risk of premature death or disability of the insured.
- General Insurance: Covers a wide range of risks such as damage to property, medical expenses, accidents, and legal liabilities.
Investment Component
- Life Insurance: Some life insurance policies, such as whole life or universal life, can have a savings or investment component in addition to the insurance coverage.
- General Insurance: Generally, there is no investment component; premiums are paid for the coverage itself.
Underwriting Process:
- Life Insurance: Underwriting involves assessing the applicant’s health, lifestyle, and medical history to determine the risk level and premium rates.
- General Insurance: Underwriting assesses the risk associated with the insured item, such as a car or property, to determine the coverage and premium.
Claim Payout
- Life Insurance: Claims are paid out upon the death of the insured, subject to policy terms and conditions.
- General Insurance: Claims are paid out based on the occurrence of the event covered by the policy, such as an accident, theft, or damage to property.
Renewal and Termination
- Life Insurance: Term life policies may expire at the end of the term, while whole life policies continue until the insured’s death as long as premiums are paid.
- General Insurance: Policies need to be renewed periodically. The insurer can choose not to renew the policy if the risk profile changes significantly.
Tax Implications
- Life Insurance: Death benefits received by beneficiaries are generally tax-free in most cases.
- General Insurance: Claim payouts are generally not considered taxable income, as they are meant to reimburse for financial losses.