Insurance is a necessary component of anyone’s financial planning. It aids in dealing with life’s uncertainties and softens financial shocks. Acquiring various types of insurance policies that cover various risks provides financial assistance in the event of an emergency.
When you buy an insurance policy, you typically pay a predetermined amount to the insurance provider as a premium. In exchange, the insurance company provides compensation if the insured event occurs. However, many of us have some difficulty distinguishing between the various types of insurance policies available on the market.
In general, there are two types of insurance: life insurance and general insurance. Here are the features, applications, and benefits of each type of insurance.
What is Life Insurance?
The insurance policy, as the name implies, protects your life. A life insurance policy is a contract between you, the policyholder, and your insurance provider. The insurance company promises to pay a sum assured to your nominee if you die unexpectedly under the terms of this contract. After the maturity date of your life insurance policy, the insurance company may also pay you the sum assured.
This payment is made in exchange for the premiums paid for the insurance coverage. In difficult times, the policy provides monetary benefits to your family. This type of insurance provides much-needed financial security to your loved ones while also serving as an excellent investment tool.
Types of Life Insurance
Term 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.
Whole Life Insurance
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
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.
Money Back Plan
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.
Critical Illness Plan
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 type of insurance that aims to protect your many assets, such as the vehicle you drive (motor insurance), the home you live in (home insurance), or protects you from financial shocks caused by illness-related hospitalization (health insurance). General insurance reimburses you for expenses incurred as a result of liabilities associated with your possessions, such as a 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.
Motor insurance
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.
Health Insurance
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.
Home insurance
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.
Term of the policy
The policy term is one of the most significant distinctions between the two types. Life insurance policies are typically long-term investments. A life insurance policy typically has a term of 15 to 20 years. General insurance policies, on the other hand, are short-term plans that are typically renewed annually, depending on the previous policy chosen.
Premium Payment
For life insurance policies, you must pay a lump sum premium or at regular intervals. The recurring intervals can be monthly, quarterly, semi-annually, or annually.
In contrast, you pay a one-time premium for general insurance when you purchase the policy or renew it. Some exceptions include travel insurance, where you pay a premium but only get coverage for a specific trip.
Claim Process
In most life insurance policies, the nominee receives the sum assured when the policyholder dies. Instead, the policyholder can receive the proceeds when the policy matures. The insurance company also provides interest generated on investments for money back and endowment plans. In the case of a critical illness policy, the policyholder can receive insurance benefits following the diagnosis of the disorder or health conditions specified in the policy terms.
The company considers a specific event when filing a general insurance policy claim. For example, depending on the policy, the policyholder may only be able to claim health insurance after being diagnosed with a disease, being hospitalized, or experiencing another medical emergency. Similarly, travel, home, or vehicle insurance can only be claimed if there has been some type of damage or loss as a result of the event.
Value of the Insurance Policy
In most cases, policyholders determine the value of their life insurance coverage. You can select the sum assured based on your needs and ability to pay regular premiums. This sum assured is then paid back to your nominee or to you after the policy matures, whichever comes first.
On the contrary, the value of an asset influences the value of a general insurance policy. Thus, depending on the type of policy, the insurance company determines the value using a variety of methods. Indemnity or benefit-based?
Bottom Line
We live in a world full of unknowns. Insurance can help you deal with these uncertainties by providing financial assistance when you need it the most. We must recognize that each type of insurance – general and life – is intended to meet your needs in order for you to live a stress-free life.
The key here is to understand their differences and find the best insurance policy that provides the most coverage and benefits. Before making any investment decisions, always consult with a qualified financial advisor.
Article Source: Forbes