Understanding the Differences: Life Insurance vs General Insurance

Most of us relate insurance with protection. In the simplest of terms, insurance is a contract where you are protected against a specific financial risk in exchange for a cost (premium). Nowadays, you can get insurance for almost every aspect of your life. Most insurance plans fall into the ‘general insurance category', as they provide financial compensation when something financially important to you is damaged or lost. Technically, even health insurance (insurance against medical costs) is a type of general insurance.

However, there is another form of insurance, known as life insurance, that is generally regarded as its own category. Life insurance covers the financial risk associated with your death. Of course, a life insurance policy cannot directly benefit you, but it does benefit your loved ones. When you buy a life insurance policy, your family will get a sum assured on death if you pass away due to any unfortunate circumstances.

Below is a more detailed breakdown of the differences between Life Insurance & General Insurance.

What is General Insurance?

Bought a new car? First off, congratulations! But alongside the joy of owning a new car, you are also undoubtedly feeling the anxiety that comes with being a car owner. Accidents can happen at any time, and the cost of repairing a damaged vehicle is not low. This is where a car insurance can really help you out. Car insurance financially protects you against any loss in case your vehicle gets damaged in an accident or due to a malfunction.

With car insurance, you can ensure your financial security even in the eventuality of an accident. This is the basis principle behind every general insurance plan. Just purchased your new dream home? Then home insurance is a must have to cover for any costs that can occur due to damages. Similarly, you can even get insurance for your mobile phone, home appliances, laptop etc. If there is a chance of financial loss, then there is likely an insurance plan that can protect you.

Even health insurance is considered a type of general insurance, where the insurance plan covers for your medical expenses when you fall ill and need medical treatment or hospitalization.

Key Features of General Insurance Plans

• Short Term- Most general insurance plans are short term contracts. You will need to renew your policy regularly if you want to maintain your coverage. Some general insurance plans can have terms as short as one year.
• A Different Policy for Different Situations- There is a different general insurance plan for different scenarios. Unfortunately, there is no general insurance plan that covers for every single eventuality that can cause financial loss. If you want to protect your car, then get car insurance, but your car insurance will not be able to provide any coverage for your scooter or truck… Each car insurance policy only safeguards a single car, so you will need separate insurance policies for all your other vehicles.
• Cost Effective- Ultimately, it is more cost effective to pay for an insurance policy than it is to completely absorb a financial loss by yourself. Sticking with the car insurance example, in case of an accident, paying for the entire repair cost will likely be a bigger financial setback than buying an insurance plan to cover for such an eventuality.
• Renewable- Most general insurance plans are renewable, meaning that you can choose to continue with your insurance plan for another term without having to go through an extensive underwriting process.

What is Life Insurance?

Life is unpredictable, and that unfortunately means that any one of us could pass away without any warning. Moreover, those who depend on you will not only struggle emotionally, but they will also have to deal with financial problems once your source of income is cut off. When you buy a life insurance plan, you are ensuring that your loved ones are financially covered in case of your death.

All life insurance plans offer a ‘sum assured’, which is the minimum amount of money your nominees/family will get if the policy is triggered. Along with providing life cover, long-term whole life insurance plans may also offer savings elements. For example, in a guaranteed savings insurance plan, your premiums act as savings as well as payment for your life cover.

Term insurance is the simplest form of life insurance, where you get life cover for a set period of time with no other benefits. Moreover, term insurance is also quite affordable and is a must have for any person who has dependent family members to take care of.

Key Features of Life Insurance

Long Term- Life insurance plans generally have a longer policy term when compared to general insurance. Life insurance policy terms can vary from 5 years to 100 years. Some plans also offer ‘whole life cover’, which means that your policy remains active irrespective of how much time has passed since you first purchased it.

• Savings Element- Long term life insurance plans can also provide a host of other benefits, including savings benefits where your insurance plan can become a second source of income. Nowadays, there are multiple types of savings insurance plans that provide both life cover and guaranteed income. You can also choose a Unit Linked Insurance Plan (ULIP) if you want a plan that offers investments in market-linked funds.
• Riders- Life insurance plans can be further enhanced with optional riders. For example, a critical illness rider will provide an additional payout if you are ever diagnosed with a serious debilitating disease (cancer, organ failure etc.). Riders are completely optional but adding them to your insurance plan can greatly enhance the coverage provided to you and your loved ones.
• Peace of Mind- Worrying about your family’s financial well-being is a constant anxiety for any breadwinner. This is why life insurance is so important. Knowing that your family will be provided for, even when you are gone, is a great way to achieve peace of mind.

General vs Life Insurance

General Insurance	Life Insurance
Short term Contract.	Long term Contract.
Protects against financial loss in case of damage to an asset.	Protects your family from financial hardship in case of your untimely passing.
Generally, do not offer additional benefits.	You can opt for additional benefits & riders, plus, savings element available in certain plans.
Example- Car insurance, home insurance, health insurance etc.	Example- term insurance, guaranteed savings plans, unit linked insurance plans etc.
Premium to be paid as lumpsum.	Premium can be paid as monthly, quarterly, half-yearly, or yearly. Single-pay premium also available.
Policy holder is mostly the beneficiary in this case.	Anyone a policyholder nominates can be the beneficiary in case of their death. For a policy reaching its maturity, beneficiary can be anyone including the policyholder.

 

Conclusion

If you have any asset that can be damaged or lost, then getting a general insurance plan for said asset is a sound decision. General insurance ensures that you avoid serious financial loss due to misfortune that was out of your control. On the other hand, life insurance is a must have for almost every person, and especially so for people who have dependent family members. Life insurance can ensure that your loved ones are financially secure even in your absence. Moreover, you can even use life insurance to further enhance your portfolio by opt for a savings plan that slowly grows your wealth over time.

 

Chirag Iyer - BFSI Enthusiast

Chirag is a writer and an avid reader who loves to drink coffee! His other interests include boxing, karate, and singing.