You must have heard the term ‘insurance’ a lot of times and even of different types such as life insurance, travel insurance, health insurance and so on.
This article will give you an idea of the difference between life and general insurance.
Here are two situations:
Situation A: Mr. C has a wife and 2 children. Mr. C meets with an accident and passes away. His partner who does not work is struggling very hard to meet the regular bills and provide for the family as the savings are not enough. Coping with the loss of a loved one and to deal with the sudden financial changes can be challenging.
Situation B: Ms. S is driving her car and another car from behind rams into her car because of which, the bumper gets damaged and the headlights break. Ms. S gets injured and needs to get hospitalized. Now, she must pay for repairing her car and the hospital bills from her savings. She had to spend about Rs.50,000/. She was planning on using this money to go on a vacation.
In both Situation A and B, the events that took place are uncertain that is, it is not something you can predict. These situations can have anegative impact on your financial condition.
If you are falling you can either fall flat or you would use your hand as protection to reduce the impact of falling. Now, in both these situations, you are going to face some pain but when you use your hand, the pain is lesser.
In life, you need a hand at times of such unfortunate events and an insurance policy can prove to be handy.
An insurance policy is an agreement between the insurance company who is the insurer and the individual who purchases the policy. Here, the insurer will promise to give some amount as compensation or reimburse the loss when that unfortunate event takes place. For this promise to be fulfilled the individual needs to pay a premium regularly.
There are two main types of insurance policy i.e. Life Insurance and General Insurance. In the above-mentioned situations (A and B), a life insurance policy would be helpful in situation A and general policies in situationB.
In a Life Insurance policy, you insure a person’s life. If the individual, also known as the insured, dies, then the insurer will provide for compensation. This compensation known as the sum assured will be given to a person whose name is mentioned in the policy as the one who should receive the sum assured. This policy is purchased for a specific period and if this event occurs within that time period than the sum assured is provided. The compensation amount is decided when the policy is purchased.
Purchasing a life insurance policy is an important financial decision especially if there are members dependent on your income. Though, emotional damage cannot be compensated at least the financial damage can be mitigated to an extent with a life insurance policy.
A General Insurance is purchased to insure a non-living thing such as a car, house, health and so forth.
In Situation A if Mr. C had purchased an Insurance policy whose sum assured was Rs. 1 crore then his partner would not have had to worry about finances for at least a while. His partner would have received the amount as compensation for the loss.
Similarly, in situation B, if Ms. S had a motor insurance and health insurance then she would not have to bear the entire expense on her pocket. The motor insurance would have reimbursed the car repair bill amount to a certain extent and even her hospital bills would be reimbursed to an extent if she had health insurance.
Though both a life insurance policy and a general insurance policy serve a similar purpose there are some key differences in aspects like:
1. Tenure of the Policy
Life insurance is always purchased for a long duration like 20 or 30years and the premium is paid regularly. Whereas general insurance is taken fora short duration like 1-3 years and the premium for it is paid upfront.
2. Value of policy
In life insurance, the sum assured is determined by the policy holder which is dependent upon the premium paid and on the occurrence of the event the entire amount promised is payable. However, in general insurance, the claim amount is limited to the loss incurred regardless of the policy value. Also, if the loss incurred is more than the cover then, only till the amount the cover for the risk was taken will be compensated.
3. Payment of Policy Value
The sum assured is given out when the unfortunate event occurs or when the policy matures in certain types of life insurance policies. In the case of general insurance, only when the event occurs the amount equivalent to the loss incurred is paid out.
When you are purchasing any insurance, make sure to always give the correct personal details. As, if you give wrong information the insurance agreement will be void. Also, make sure to read and understand the entire terms and conditions before agreeing to the contract.
You might feel like you are simply paying for these insurance policies for events that might not even happen. You might think it is a waste of money. However, life is not going to be smooth always.
“Life is unpredictable, always be prepared for the best and the worst”.