Comparing Life Insurance and General Insurance: The Difference Between the 2
While everyone advises you to get insurance for yourself, your possessions, and your loved ones, no one talks about the different kinds of insurance that are available. Most of you now must be aware of the two basic types of insurance: life insurance and general insurance. However, there must be a simple question in your mind, what are the key differences between the two, and how can they benefit you and your family in your hour of need? Picking the right insurance is vital if you want to reap its advantages. Here is a simplified yet detailed guide on insurance, so you know when to choose what.
Just like the name suggests, life insurance is a cover for your life. Life insurance can offer your family monetary relief in difficult times. This type of insurance provides financial security to the nominee (spouse, children, etc.), in case of an unfortunate event. It also serves as an investment tool in some cases. Here’s all you need to know about life insurance.
Types of Life Insurance
- Term Life Insurance: In this plan, the policyholder is insured for a fixed term or period. If the insured person passes away within this term, then the nominee or family members of the insured can file a claim to the insurance company and receive the insurance money. With an increase in life expectancy, term plans these days offer policies that can cover you till you are 99 years old
- Whole Life Insurance: Unlike term insurance, whole life insurance is not limited to a fixed term and provides coverage for life, i.e. throughout the lifespan of the policyholder. This plan only matures when the policyholder is not around anymore, after which the family members can claim the insurance amount. This policy cannot be claimed by the nominee, during the lifetime of the policyholder
- Endowment Plan: Endowment plan is a life insurance policy that also acts as an investment tool. In the case of an endowment plan, the nominees can claim the life cover+ amount, if the insured person passes away during the term of the policy. The policyholder can also claim survival benefits if he/she outlives the term of the policy
This plan is unique because it is a combination of insurance and investment. A part of the premium is reserved for the policy and the sum assured, while the other part is used for investments. On maturity, the nominee or the policyholder gets the sum assured as well as the bonus earned from investments
- Unit Linked Insurance Plans: Commonly referred to as ULIPs, these plans provide growth of money as well as life cover+. With Unit Linked Insurance Plans, policyholders can enjoy the benefits of insurance and investment under a single plan. In ULIPs, the premium paid by the policy owner is divided into two parts. One part is used to invest in markets, just like in the case of mutual funds, and the other part is used to provide a life cover+
- Critical Illness Plan: This plan can be used to cover the expenses of specific life-threatening diseases. Critical illness plans cover the costs of hospitalisation and diagnosis of the said disease. The policyholder can claim the sum assured if he/she suffers from a critical illness. The remaining balance can be availed upon the maturity of the policy, as per the terms of the policy
- Money-Back Plan: This plan works just like an endowment plan, but the beneficiary need not wait until the policy matures to get the returns. Money-back plans pay returns after fixed intervals within the policy term, for example, after 5 years or 10 years from the date of the purchase of the policy
While life insurance covers the life of a person, general insurance provides cover to other aspects and assets in a person’s life, for example, health, car, travel, home, etc. This type of cover insures assets against theft or damage due to fires, natural calamities, accidents, man-made disasters like riots or terrorist attacks, etc. While life insurance policies provide cover against the risk of life, general insurance provides cover against other types of risks that may affect a person’s health or some of his/her physical assets like a home or a vehicle etc.
Types of General Insurance
- Health Insurance: This is one of the most common types of general insurance and provides cover against medical emergencies and hospitalisation expenses. A person can choose between specific plans for certain types of ailments, like heart and cancer ailments, accidents, etc. There are different types of health insurance plans available in the market today. One can choose an individual cover or opt for a family cover for all the family members
- Home Insurance: Just like insuring health, one can also insure his/her house for a certain sum of money. Home insurance provides security against natural calamities like earthquakes, floods, riots, theft, etc., that can damage one’s home or its belongings. If a person suffers any loss due to any of these reasons, he/she can submit a claim to the insurance provider. After carefully assessing the extent of the damage, the insurance company will pay the insurance claim
- Travel Insurance: Travel insurance is specific to a trip and a person can get the insurance right before he/she starts the journey. This type of insurance provides security against the loss of baggage, delay or cancellation of flights, accidents or hospitalisation expenses, etc, during a trip. If a person meets with an unfortunate accident or loses his/her baggage, he/she can claim travel insurance to cover these expenses
- Motor Insurance: Motor insurance secures vehicles and provides cover against damage due to accidents, theft, riots, terrorist attacks, or natural calamities like floods, cyclones, etc. Motor insurance is of two types:
- Comprehensive Insurance: This includes a broader spectrum of things. Comprehensive motor insurance covers both parties involved in an accident. It also provides cover against theft or damage due to factors like natural calamities, human-made disasters like riots, vandalism, and more
- Third-Party Insurance: This only provides cover to the third party involved in an accident. This type of insurance usually has a lower premium than comprehensive insurance
Now that you know the meaning and types of life and general insurance; let’s move on to some significant differences between the two.
Key differences between General and Life Insurance
Term of contract
One major distinction between the two is the duration of the policy. Life insurance plans are long-term plans and require policyholders to either pay a lump sum premium, or regular monthly, quarterly, or yearly premiums for a significant amount of time. For example, 15-20 years or up to a lifetime.
General insurance, on the other hand, is a short-term plan that is generally renewed yearly.
The premium for a life insurance policy is paid at regular intervals like monthly, quarterly, or yearly. In contrast, the premium for a general insurance policy is paid at once, either when the policy is bought or when it is renewed. This may differ in the case of a travel insurance plan, where a person pays a premium only while buying insurance for a specific trip.
In the case of a life insurance policy, the sum assured is paid to the nominee during the policy term in the event of the policyholder’s death. The sum assured can also be returned to the policyholder on maturity. In the case of endowment and money-back plans, the insurance provider also pays back the interest earned on investments. Another important thing to note is that in case of a critical illness, the policyholder can claim life insurance benefits upon diagnosis of the disease or health condition covered under the policy if the relevant rider is chosen during the purchase of the policy.
The insurance claim of general insurance can depend on some specific events. For example, general health insurance can only be claimed after hospitalisation, in case of a medical emergency or ailment diagnosis, depending on the policy. In the same manner home, motor, or travel insurance can be claimed only if there has been any loss or damage to an asset due to an unfavourable event like a robbery, accident, or any such event.
The policy value for a life insurance plan depends on the preference of the policyholder. One can fix the sum assured depending on the requirements of his/her family and the ability to pay premiums. The sum assured is then paid back to the policyholder on maturity or to the nominee in case of an unfortunate event.
As opposed to life insurance, the policy value of general insurance is influenced by the value of the asset. The policy value, in this case, is based on the damage suffered and not on the sum assured.
Life insurance has a component of savings and General insurance has no such component. Life insurance is an insurance against life- risk only and General Insurance is insurance against motor, fire etc.
Contact us at Shimin Insurance Agency, we are the leading insurance agency in Kenya, providing car, home, business, health insurance, Life and any other general insurance. Through establishing partnerships with various reputable insurance companies in the industry, the Agency has developed a full banquet of innovative insurance products and services that address the insurable needs of our customers and offers these services from across our branches in Kenya.