Explained guide on insurance types: General and Life Insurance

Insurance is one of the cornerstones of financial planning. It covers you, your dependents and your assets against financial losses incurred in case of an unfortunate event. The concept of insurance is pretty simple. You pay a certain amount called the premium to the insurer for getting coverage of a pre-determined amount for any damages suffered.

However, depending on what your insurance covers, they are classified as life and general. In this article, we will explain both these types of insurance and their various aspects.

What is General insurance?

General insurance covers non-life assets - such as your home, vehicle, health, travel – from floods, fire, thefts, accidents and man-made disasters.

Types of general insurance

Here are different types of general insurance.

1. Health insurance

An essential risk mitigating tool, Health insurance prevents out-of-pocket expenses while dealing with a medical emergency. A general health insurance plan is an indemnity plan that pays for hospitalisation expenses up to the sum insured. While you can avail of a standalone health policy, family floater plans provide coverage to all the members of your family.

Additional Read: Health Insurance plans available in India

On the other hand, critical illness plans are fixed-benefit plans that provide a lump sum upon diagnosis of a critical ailment and cover medical costs such as pre-and post-hospitalisation costs.

2. Motor insurance

Motor insurance covers your vehicles against accidents, damage, theft, vandalism, and so on. This form of insurance comes in two forms – comprehensive and third-party. A comprehensive motor insurance policy provides a 360-degree cushion to your vehicle against damages caused due to flood, fire, riot, etc. Along with this, it also offers you the rider or add-on benefit, a personal accident coverage and third-party liability.

On the other hand, a third-party motor insurance takes care of the damages suffered by a third party in case of an accident caused by your vehicle. It won't cover any damages to your vehicle. As per the Motor Vehicles Act, 1988, it's mandatory for every vehicle plying on the road to have a third-party insurance.

Additional Read: 5 Best Car Insurance plans to choose from

3. Home insurance

As the name suggests, a home insurance policy protects your home and its belongings from the damages suffered due to man-made or natural disasters. Some home insurance policies also provide coverage for temporary living expenses if you live on rent due to your home undergoing renovation.

Additional Read: Choose from these 7 options if looking for a Home Insurance policy?

4. Travel insurance

In case you are travelling abroad, a travel insurance policy protects you against losses suffered due to loss of baggage, delays in flight and trip cancellation. In some cases, if you are hospitalised while travelling, a travel insurance may also offer cashless hospitalisation.

Difference between life and general insurance

• Meaning and coverage
  Life insurance covers your life and also has provisions to provide a savings and investment avenue. Savings here mean the benefit you receive on maturity. For example, if the policyholder outlives the policy period, he or she can get back the premium paid over the years. General insurance is a contract of indemnity covering non-life assets. It is a promise to make good on your losses, but with no savings or investment avenue, i.e., no part of the premium can be reimbursed if the claim is not made.
• Purpose
  Life insurance gives a payout in case the policyholder dies. In contrast, in case of a general insurance, payouts are made in an unexpected loss such as an accident or a theft or a sudden liability.
• Term of contract and payment
  Life insurance is a long-term contract and requires you to pay the premiums in monthly instalments. Meanwhile, general insurance is a short-term contract to be renewed every year and requires you to pay the entire premium on renewal.
• Payment of claim
  In case of life insurance, the insurable amount is paid on the event's occurrence or on the policy's maturity. For general insurance, financial losses are reimbursed when an uncertain event occurs.
• Policy value
  Life insurance can be done for any value based on the policy holder's premium. In general insurance, the amount payable is restricted to the liability incurred or actual loss suffered, irrespective of the policy amount.

What is life insurance?

As the name suggests, life insurance covers your life. In case of the policyholder's premature demise within the policy term, the insurance company pays the sum assured to the nominee. One of the essential financial instruments, life insurance, helps your family stay financially independent, square off liabilities taken in the form of loans, maintain the lifestyle provided, and keep essential goals on track.

Types of life insurance

Here are types of life insurance.

1. Term life insurance:

Term insurance is the simplest form of life insurance available in the market. A pure protection plan, term insurance offers extensive coverage at an affordable premium. A 30-year-old non-smoking male can opt for a term plan providing a coverage of Rs. 1 crore for a policy term of 30 years by paying a nominal premium. Term plan gives you the flexibility to choose a sum assured 15-20 times your annual income.

It pays your nominee the sum assured in case of your demise within the policy term. The insurance proceeds received help your family to meet daily expenses and pay off debts. Note that pure term plans have no maturity benefits. It means, in case you survive the policy term, you don't get these benefits.

However, of late, insurers have come up with the return of premium term insurance plans that return all the premiums paid if you survive the policy term. But these plans are slightly more expensive than pure term plans.

2. Endowment plans

Weaving insurance and investment in a single product, endowment plans offer life cover and build a corpus for essential life goals. A certain portion of the premium goes towards the sum assured, while the other portion is invested in low-risk avenues. In case of your demise during the policy term, your nominee gets the sum assured.

In case you survive the policy term, you get the sum assured as maturity amount along with the accumulated bonuses. Thus, endowment plans fulfil the dual needs of insurance and investment.

3. Money-back policies

Money-back policies are similar to endowment plans, except they pay a certain amount at pre-defined intervals during the policy term. For instance, a money-back policy for a term of 15 years may pay a certain amount at the end of the 5th and 10th years of the policy term. On policy maturity, it pays the maturity benefits along with the accumulated bonuses.

4. Unit linked insurance plans (ULIPs)

Combining insurance and investment in a single product, ULIPs offer life protection and the opportunity for capital appreciation by investing in various funds of varying degrees of risk. Like endowment policies, in ULIPs a certain portion of the premium provides life cover, while the other is invested in markets to earn returns.

Additional Read: Step-by-step guide to choosing a ULIP

Every ULIP has underlying funds belonging to different asset classes such as equities, debt and hybrid where it invests to generate returns. ULIPs offer partial withdrawal after the end of the lock-in period (5 years) and provide a switching facility whereby you can switch from one fund to another. This facility comes in handy when you are nearing your goal, wherein you can switch from an aggressive fund to a debt fund.

5. Whole life insurance

As the name suggests, whole life insurance offers you coverage for your entire life. The policy term for whole life insurance plans extends up to 100 years and as long as the premiums are paid, the policy's benefits are kept intact.

If the policyholder survives the policy term, then he/ she gets the maturity benefits. If you want to remain insured throughout your life, whole life insurance plans are a good choice to make.

The table below summarises the major differences between life and general insurance:

Both life and general insurance are needed to cover all aspects of your life comprehensively.