Life is full of uncertainties. Insurance is a critical financial decision that helps to deal with life’s uncertainties. Insurance denotes an arrangement in which the insurer commits to provide compensation for loss, damage, or death, caused to the insured in return for the premium. Investing in insurance can help get through times of crisis.
Term insurance covers life risks and guarantees compensation by paying a fixed amount upon death of the insured person or after a certain time. After a few years, the policy can be surrendered, and the policyholder receives part of the premiums paid (surrender value). Contracts are of two types namely, life insurance and general insurance. The insurance plan covering the life risk of the insured is called life insurance, and the insurance plan covering any risk other than an individual’s lifetime risk is called general insurance.
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What is life insurance?
Life insurance is an insurance that provides financial relief to families in case of untimely death of the insured. In an unfortunate event that the insured person loses his life, insurance offers financial assistance to the spouse and children.
Life insurance is a contract that obliges the insurer to provide financial compensation to the beneficiary in case of a policy-covered unfortunate event, such as the untimely death of the insured. In return, the policyholder pays a predetermined amount as a term or a one-time premium. The insurance covers a certain period, and if the policyholder survives the insurance, he is entitled to surrender perks according to the contract. In some cases, it also functions as an investment.
Types of life insurance
In this plan, the policyholder takes out insurance for a certain duration. If the insured person passes away within the period of the policy, the insured’s agent or family member can claim the insurance from the insurance company and receive the insurance money. With increasing life expectancy, a term plan provides the insured person coverage until he is 99.
Whole life insurance:
Whole life insurance is not bound to a fixed period and provides whole life insurance over the policyholder’s lifetime. The plan expires only when the policyholder is no longer there, after which the family can claim the insured amount. A nominated person cannot claim this insurance when the policyholder is living.
Capital life plan:
A capital life plan is a life insurance policy that doubles as an investment vehicle. In the case of whole life insurance, if the insured person dies during the period of insurance, the insured person can claim the life insurance benefit. Policyholders can also claim a living benefit if they survive the policy period.
Unit-linked insurance plans:
Commonly referred to as ULIPs, these plans offer both cash appreciation and life insurance. A unit-linked insurance plan allows policyholders to enjoy insurance and investment in a single plan. In ULIPs, the premium paid by the policyholder is split into two parts, one is used to invest in the market like a mutual fund, and the other is used to provide life insurance.
Critical illness plan:
This plan pays in case of certain life-threatening illnesses. A critical illness plan covers the cost of hospitalisation and the diagnosis of that illness. Policyholders can claim benefits in the event of severe illness or when the policy expires, subject to the terms of the policy.
This plan works like the lump sum lifetime plan, but the beneficiary does not have to wait.
Life insurance covers a person’s life, while property and casualty insurance covers other aspects of a person’s life and assets. This type of coverage insures assets against theft or damage due to fire, natural disasters, man-made disasters such as riots or terrorist attacks. Life insurance protects against life risk. A typical insurance policy protects against other risks that can affect a person’s health or some of their physical assets, such as homes and cars.
Property and casualty insurance, also known as general insurance, is a contract that covers all risks other than life risks. Insurance protects property, such as homes, cars, and other valuables, from fire, theft, floods, storms, accidents, earthquakes, among others. It is an indemnity contract under which the insurance company promises to compensate for damages incurred by the insured. Regardless of the insured amount, the insurance company pays for the damage suffered by the insured. Usually, the plan is of a short term for one year and is renewed annually.
Types of general insurance
General insurance protects against medical emergencies and hospital expenses. A person can choose specific plans for specific types of illnesses, heart disease, cancer, and accidents. Many types of health insurance plans are available. The person can choose individual insurance or family insurance for all family members.
Similar to health insurance, a person can insure their home for a fixed amount. Home insurance provides security against natural disasters such as earthquakes, floods, riots, and theft that can damage your home and its property. The insurance company pays the claim after assessing the extent of damage.
Travel insurance is travel-specific, and people can purchase it before a trip. This insurance protects against lost luggage, flight delays or cancellations, accidents, or hospital bills while travelling. Travel insurance is available to cover these costs if a person has an unfortunate accident or loses luggage.
Motor insurance protects the vehicle from damage caused by accidents, theft, riots, terrorist attacks, or natural disasters such as floods. Motor insurance is two types:
This insurance has a wide scope. Comprehensive insurance covers both parties in an accident and provides coverage for theft and damage caused by factors such as man-made disasters such as as natural disasters, riots, and vandalism.
This insurance provides insurance only for third parties involved in an accident and typically costs less than comprehensive insurance.
Differences between life insurance and general insurance
A life insurance plan is a long-term plan that requires the policyholder to pay a fixed amount or regular monthly, quarterly, or annual premiums for a certain period. For example, 15-20 years or the entire lifetime. General insurance is a short-term plan that is generally renewed annually.
Insured persons pay life insurance premiums at regular intervals, such as monthly, quarterly, or yearly. By contrast, general insurance premiums are paid immediately when the policy is purchased or renewed. General insurance may differ from travel insurance, where you only pay a premium if you are insured for a specific trip.
In the case of life insurance, if the policyholder dies during the contract period, the insurance benefit is paid to the insured. The insured amount can be repaid to the policyholder when it is due. For lump sum and refund plans, the insurer reimburses interest earned on the capital investment.
General insurance eligibility may vary depending on the specific event. For example, insured persons can only use public health insurance after a hospitalisation, medical emergency, or illness diagnosis. Similarly, home insurance, auto insurance, or travel insurance can only be claimed when the property is affected by an undesirable event such as a burglary, accident, or similar event.
The value of a life insurance policy depends on the policyholder’s preferences. The amount insured can be set according to the family’s needs and ability to pay the premium. The insured amount will be refunded to the policyholder when it is due. In case of an unfortunate event, the insurer pays back the insured amount to the family.
Unlike life insurance, the contract value of general insurance is affected by the value of assets. In this case, the insured value is determined by the damage suffered, not by the sum insured.
A life insurance policy is a binding agreement for a specified period, and general insurance, on the other hand, is an annual renewal contract.
The policy amount covered by a life insurance policy is calculated by the premium paid by the insured. As with general insurance, the amount paid is limited to the loss sustained rather than some fixed percentage of the policy value.
Saving is generally present in life insurance but not in general insurance.
General insurance and life insurance are two distinct types of insurance. In life insurance, insurers routinely estimate liabilities from current policies, and general insurance carries part of the premium to cover the unexpired liability and the remaining amount.
General insurance covers all risks and saves the person’s life, and life insurance covers the insured’s life. Life insurance includes a savings component, but general insurance does not. Life insurance is against life-related risks, whereas general insurance protects against an automobile and fire.
Even though risks are covered, there are always ways to prevent losses. For the Indian economy to grow, every business should insure its assets. If the price of stocks changes considerably over a year, buying a declaration insurance policy can help.
Why should a person have life insurance?
When a working family member experiences an unfortunate event, life insurance can help pay off debts and cover ongoing expenses.
What are the things that should be considered while purchasing insurance?
You should review the policy for return guarantee availability, vesting period, premium payment details, reinstatement terms, and settlement claim terms.
What is a no-claim bonus?
Most policies offer a no-claim bonus after one year of no claims, which applies to life insurance and general insurance plans.
What do you mean by the ‘waiting period’ for a policy claim?
A policy's waiting period is predefined before an insurance company can claim coverage.
What is a ‘claim’ in an insurance policy?
A claim is simply a formal request to the insurance company to claim compensation under the terms of the policy.
What is compulsory automobile liability insurance?
Liability insurance is a contractual arrangement under which an insurance company promises to compensate for actual or potential losses and damages suffered by the policyholder in return for the payment of a premium.