Rahul wants to buy insurance. He understands the need of insurance. But he does not know how to go about it. The financial jargon does not help. In particular, the terms ‘life insurance’ and ‘general insurance’ confuse him. As a newbie, he is unsure about the difference.
The Two Types of Insurance
Insurance has two broad categories: life insurance and general insurance. Life insurance relates to the life of the policyholder. General insurance deals with everything else. Understanding the differences between the two types of insurance is crucial. It helps you to understand the benefits of insurance. The significance of insurance becomes clear as well.
What is Life Insurance?
Life insurance policies pay a lump sum amount to the beneficiaries of the policyholder upon his death. This payout is the death benefit. Often, the policyholder survives the policy period. The policyholder then receives a maturity benefit. The insurer agrees to this in exchange for the premium that the policyholder pays.
What is General Insurance?
All other forms of insurance belong to general insurance. Health and property insurance come under general insurance. This type of insurance typically covers losses caused by theft or damage. In the case of health insurance, the cover is for medical expenses. Rahul visited the Bajaj Finserv website as part of his preliminary research on insurance plans. He found various sub-categories of general insurance. On speaking with a Bajaj Finserv representative, he realised that each functions in its own way.
Key Points of Difference Between Life and General Insurance
- Duration: This is the first and one of the most significant differences. A life insurance plan is a long-term investment. In contrast, a general insurance plan is often a one-year contract. But there are exceptions. You can have short-term life insurance plans. Meanwhile, some general insurance plans, such as health plans, have longer durations.
- Premiums: A life insurance premium is usually paid over many years. Some people pay the insurance premium in one go. But that is not common practice. Most general insurance plans require you to pay the premium in one go. This happens at the start of the policy.
- Savings: Many life insurance plans also combine an element of savings. Say, you outlive the policy period. You then receive a maturity benefit. This is essentially the premium that you paid over the years. General insurance has no savings component. Even if you do not make a claim, you cannot get any part of your premium back.
- Purpose: The purpose of life insurance is to give a payout at the death of the policyholder. But you can also get a payout at maturity. Some plans also give payouts at regular intervals, irrespective of any emergency. The purpose of general insurance is more direct. A payout takes place only at the time of a crisis, like an accident or a theft.
Life insurance and general insurance are completely different kinds of insurance. But the significance of insurance remains unchanged. If you have no insurance yet, review your needs. Then shop around and choose a few suitable life and general insurance plans. Insurance brings financial security to your life. That is the ultimate purpose of insurance.