Life is full of risks, and we all need security against these risks. While risks cannot be avoided entirely, insurance offers the best protection by minimising the financial burden arising due to any unforeseen event.
Insurance can be divided into two broad categories: Life insurance and General Insurance. Both are equally important but different from each other. Let us first understand both life insurance and general insurance.
What Is Life Insurance?
Life insurance covers your life risk and offers a guarantee to pay a specified amount on death or completion of the policy tenure. It is an agreement between the insured and the insurer where the insurer agrees to pay a certain amount to the beneficiary nominated by the insured in exchange for premiums in the event of the demise of the life insured. However, some life insurance policies also offer maturity benefits, i.e. a certain sum of money would be paid out to the policy if the life insured survives the entire policy tenure as a maturity benefit.
What Is General Insurance?
General insurance is non-life insurance and covers any risk other than life, such as health, vehicle, property etc. It is an indemnity contract between the insurer and the insured, where the insurer reimburses the loss to health or assets due to fire, theft, accident, earthquake, etc. There are no maturity benefits available in a general insurance plan.
Now that we know what life insurance and general insurance mean, let us compare the two and understand how both differ.
Life Insurance V/S General Insurance
Following are some points based on which life insurance and general insurance are compared:
The basic underlying principle of a general insurance plan is the “Principle of Indemnity”, i.e. which covers the financial loss for the event insured. So, if it is an accidental insurance plan or a travel-related insurance plan, if the listed event, i.e. the accident or the travel mishap, happens, then the financial loss associated with the same would be compensated by the insurance plan. However, this principle doesn't apply to life insurance as the financial loss associated with a loss of life cannot be quantified.
Life insurance is an agreement between the insurance company and policyholder to cover the risk of life. General insurance includes all other types of insurance which cover anything other than life, such as health, motor, property, travel etc., as the case may be. General insurance plans do have some coverage for loss of life in some cases, but that is not the sole purpose of the plan.
Duration of Coverage:
Life insurance is a long-term contract providing coverage for several years, whereas most general insurance plans are short-term contracts renewed annually for continuous coverage.
Nature of Coverage:
Life insurance acts as a protection tool for the future financial security of the policyholder's family after his demise. General insurance is an indemnity contract that compensates for any loss or damage.
Premiums for life insurance are fixed depending on the coverage opted by the policyholder and are paid periodically for the policy tenure, which could be annually, semi-annually, monthly, in a lump sum or for a limited duration. However, the coverage continues as long as the policy contract has been taken.
In general insurance, the premium varies depending on the condition of the insured asset and is usually paid in lumpsum as it is for a short duration.
In life insurance, compensation is called the sum “assured” and depends on the coverage chosen and the total premium paid. It is paid on the maturity of the policy or the occurrence of the insured event; usually, the death of the life insured. In general insurance, the compensation amount is called the sum “insured” and is paid upto the actual loss subject to the policy limit.
In life insurance, the beneficiary is the person nominated by the policyholder to receive the benefit of the claim. Usually, it is the family members such as spouses or children.
In general insurance, the beneficiary is the policyholder himself, who receives the claim.
Some life insurance plans may provide a savings component to create a corpus for the future. General insurance plans offer no such saving element as there is no maturity benefit attached with it.
The annualised premium paid towards a life insurance plan is tax-free under section 80C upto INR 1.5 lakhs per year. In contrast, this benefit is not available in most general insurance plans, except health insurance, where you get a benefit upto INR 25,000 for a premium paid towards a health plan for self, spouse and dependent children and an additional amount for a premium paid for dependent parents.
The maturity benefit received by life insurance plans is also tax-free u/s 10(10D), provided the coverage amount is a minimum of 10 times the annualised premium. Again this benefit is not available in general insurance plans, as there is no maturity benefit at all. However, compensation for loss in a general insurance plan is not taxable in the hands of the recipient, nor is death benefit in the hands of the nominee.
Life insurance and general insurance both serve different purposes, and both are required to provide financial security to an individual. Having one does not mean that you don’t need the other. One protects from life risk, and the other protects in case of any emergency or loss. To live a stress-free life, understand the difference between different types of insurance and procure the one that suits your requirements. Consult a professional to make an informed decision and get yourself, your family and your assets adequately covered.