Every individual faces many financial risks such as unexpected medical expenses, property damage, theft, loss of income due to disability or death, accidents, and other unforeseen situations. These risks can be destabilising, which is why it’s important to protect against them. In financial planning, we manage these risks through insurance. By paying a premium, you can transfer these risks to the insurance company.
Broadly, insurance is categorised into two types – life insurance and general insurance. If you’re wondering what the difference between life insurance and general insurance is, you’ve come to the right place! We’ll learn what they mean, look at some of their common types, and understand the differences between life insurance vs general insurance.
Key Differences Between Life Insurance and General Insurance
Both life insurance and general insurance play important roles in financial planning. The following table will help you understand life insurance vs general insurance differences:
| Parameters | Life Insurance | General Insurance |
| Cover | Life insurance policies provide coverage in case of death. | General insurance policies cover non-life assets, such as home, health, travel, and vehicles. |
| Compensation | The sum assured is predetermined, so the beneficiaries receive the compensation if the insured dies during the policy term. If the policyholder outlives the policy, some plans also pay the maturity benefit which may vary. | Compensation depends upon the loss or damage to health or assets. It is basically a reimbursement. |
| Premium | The cost of a life insurance premium depends on many factors such as age, health, and lifestyle. The premium does not change during the payment period. | The cost of premiums is usually lower than life insurance premiums. In the case of health insurance, the premium also depends on age, lifestyle, medical history, and occupation. |
| Premium Payment Term | Life insurance premium can be paid monthly, annually, quarterly, or semi-annually. One can even pay a lump sum. | Usually, the premium has to be paid annually. |
| Tenure | Life insurance policies have a long tenure which can extend to many decades. Whole life insurance plans have a tenure of 99 years. | These policies have a short tenure, as most of them have to be renewed annually. |
| Repayment Amount | The amount paid by the life insurance company is called the sum assured or death benefit, and it is paid out when the policyholder dies. In case the policy offers guaranteed returns the amount paid is called maturity benefit. In the case of ULIPs, the amount depends on the performance of the chosen funds, which can vary based on market conditions. | The insurance company assesses the damage or loss to the policyholder and compensates accordingly. |
| Beneficiary | The beneficiary is usually the dependents or the loved ones of the policyholder, but the policyholder can nominate anyone to receive the benefits. | Generally, the policyholder is the beneficiary. |
So the main difference between life insurance and general insurance is that life insurance pays out a benefit to the policyholder’s loved ones if they pass away, while general insurance covers specific risks and damages to things like the policyholder’s health, car, or home.
What is Life Insurance
Life Insurance policies give financial protection to the policyholder’s family in the unfortunate event of the policyholder’s death. Beneficiaries receive a sum assured or death benefit, which can help cover living expenses, debts, and other financial obligations like funding children’s education. In turn, the policyholder has to pay regular premiums for a certain period to keep the policy active.
The insurance company calculates the premium amount based on factors such as age, lifestyle, and health. Younger and healthier people generally get lower premiums compared to older individuals or individuals with complicated medical histories. That’s why it’s important to get insurance at an earlier age when premiums are more affordable and the coverage can provide maximum benefit in the future.
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There are various types of life insurance policies, such as:
- Term Life Insurance
These types of plans are the most basic and affordable type of life insurance. Term plans provide coverage for a specific term and pay a death benefit if the policyholder dies during that term. If the policyholder survives the term, no maturity is paid out.
- Whole Life Insurance
These plans focus on longevity. They offer lifelong coverage (99 years) with a guaranteed death benefit. The premiums are higher than term plans due to the longer policy term, but one also gets guaranteed payouts. Should the policyholder live past 99 years, they get the maturity benefit.
- Endowment Plans
These are a combination of life insurance and savings. Endowment plans provide guaranteed returns as the savings component is invested in low-risk assets.
- Unit Linked Insurance Plans
ULIPs also combine insurance and investment. A part of the premium you pay goes towards covering your life, while the other is invested in a mutual fund based on your risk tolerance. You are also allowed to freely switch between different fund types, such as equity, debt, or balanced funds, depending on your financial goals and market conditions.
What is General Insurance
General Insurance is a broad term. It includes different types of insurance that cover non-life aspects, such as home, health, travel, and motor vehicles. The insurance company pays compensation in case of damage or loss due to man-made disasters, theft, fire, accidents, floods, natural disasters, and other events. Some common types of general insurance are:
- Health Insurance
The rising costs of healthcare have made health insurance essential. These policies cover medical expenses and treatments, such as hospitalisation, medicines, surgeries, and preventive care. The premium depends on several factors like the policyholder’s age, habits (such as smoking or drinking), occupation, and pre-existing health conditions. The older the policyholder or the more severe the health issues, the higher the premium will be, so it’s also important to cover health as soon as possible.
- Home Insurance
This type of insurance protects against damage to the home (buildings insurance), as well as any belongings within the home (contents insurance) due to various risks like fire, theft, or natural disasters.
- Vehicle Insurance
The Motor Vehicles Act makes it mandatory for all vehicle owners to have insurance coverage. This type of insurance provides protection against financial loss from accidents, theft, violence, or damage to the vehicle. Vehicle insurance policies are generally of two types – third-party insurance, which covers the injuries or damages that are caused to other people by your vehicle, and comprehensive insurance, which covers third party insurance plus damages to your own vehicle.
- Travel Insurance
These policies are suitable for individuals who travel a lot. They cover unexpected events that might happen during travel, such as trip cancellations, loss of luggage, medical emergencies, theft, and delays.
Frequently Asked Questions (FAQs)
- Primary difference between life insurance and general insurance?
The main difference between life insurance and general insurance is that life insurance provides financial support to beneficiaries in case the policyholder dies, whereas general insurance covers specific, non-life risks, such as home and car insurance.
- How does the coverage provided by life insurance differ from that of general insurance?
General insurance covers risks to properties, such as damage to a home or car. Life insurance provides cover against death. The beneficiaries of a life insurance policy receive compensation in the form of a lump sum payment.
- In what situations would someone need life insurance versus general insurance?
Any earning person with dependents or financial obligations needs to have life insurance. It makes sure that their income is replaced and their loved ones are financially protected in their absence. General insurance, on the other hand, is important for protecting assets against damage, fire, accident etc., as well as managing medical costs.
- Can life insurance and general insurance be purchased together or do they serve separate purposes?
Both general and life insurance serve different purposes. Life insurance provides coverage against death, whereas general insurance covers risks to health and assets. Usually, they are bought separately, but they can also be purchased together through clubbing. Having both is recommended as it provides comprehensive protection for various aspects of life.
- How does the cost of life insurance compare to that of general insurance?
Life and general insurance cover different types of risks, so a fair comparison can’t be made. Since the risk is much higher in the case of life insurance, the premiums are also higher. For general insurance, the premiums depend upon the type of insurance and risks associated with the specific insurance. For example, the premium for an expensive car would be higher than that for a cheaper car. Similarly, health insurance premiums would be higher for older individuals compared to younger, healthier individuals.
- How do the types of policies offered by life insurance companies compare to those offered by general insurance companies?
The policies offered by life insurance companies focus on providing financial support after death, which include term insurance Unit Linked Insurance Plans, endowment plans, money-back policies, whole-life policies, and critical illness plans. The policies offered by general insurance companies focus on a variety of specific risks. Types of general policies include health insurance, vehicle insurance, home insurance, and travel insurance.
- Are there any unique features or riders that can be added to life insurance policies but not general insurance policies?
Life insurance policies have riders such as guaranteed insurability rider, accelerated death benefit rider, critical illness rider, waiver of premium rider, and accidental death benefit rider. These riders give policyholders extra benefits and coverage options so they can personalise their policy according to their needs and circumstances.
