Insurance plays an important role in financial planning. Insurance assured you safety 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 who in turn offers a cover and pays a predetermined amount for the damages suffered during unfortunate event.
In this article we will cover the two major insurances i.e. life Insurance and General insurance
By the name itself, Life Insurance covers your life. In case of policyholder’s premature demise within the policy term, the insurance company pays the sum assured to the nominee. Life insurance aids your family to stay financially independent, to pay off the liabilities taken in the form of loans, to maintain the lifestyle provided, and to keep essential goals on time track.
5 Types of Life insurance
There are generally five types of Life insurance.
1. Term life insurance:
Term insurance is very easy form of life insurance. It is a pure protection plan. A term insurance generally offers you a large coverage at an affordable premium. A 20-year-old healthy man can choose a term plan that cover Rs.1 crore for a policy term of 40 years by paying a nominal premium of a little over Rs.7,000 per annum. Term plan gives you the flexibility to choose a sum assured 10-20 times of your annual income.
It pays the nominee the sum assured in case of demise of the policy holder within the policy term. The insurance amount will help your family to meet daily expenses and pay off debts on your behalf but in pure term plans there are no maturity benefits. It means, in case you survive the policy term, you won’t get any benefits.
However, many insurance companies have come up with the return of premium policy which will return all the premiums paid in case you survive the policy term. But these plans are slightly more expensive than pure term plans.
2. Endowment plans
endowment plans are like insurance and investment in a single policy, it offer life cover as well as build a strategy for essential life goals. A fix portion of the premium goes towards the sum assured, while the other portion is invested in low-risk opportunities. In case of death during the policy term, your nominee gets the sum assured. But In case that you survived the policy term, you will get the sum assured as maturity amount along with the accumulated bonuses. Thus, endowment plans fulfill the dual needs of insurance and investment.
3. Money back policies
Money back policies are similar to endowment plans, but they pay a certain amount at predefined intervals during the policy term. For example, a money-back policy for a term of 10 years, may pay a certain amount at the end of 4th and 8th year of the policy term. On policy maturity, it pays the maturity amount along with the accumulated bonuses.
4. Unit linked insurance plans (ULIPs)
A unit linked insurance plan (ULIP) is an investment product that provides for insurance payout benefits also. ULIP offers are exclusively concentrated in India. The investment cycle requires a premium payment which is invested in investment products for capital appreciation
ULIPs offer partial withdrawal facility after the end of the lock-in period and also offer switching facility whereby you can switch from one fund to another. This facility comes in need when you are achieving your goal, wherein you can switch from an aggressive fund to a debt fund.
5. Whole life insurance
by the name itself, this kind of insurance offers you coverage for your complete life span. The policy term for whole life insurance plans extend up to 100 years and as long as the premiums are paid, the benefits of the policy are kept intact.
If you want to get insurance benefits throughout your life, whole life insurance plans are a good choice to make.
General insurance covers non-living assets – such as your vehicle, house, health and travel – from unfortunate events such as floods, fire, thefts, and accidents.
4 Major types of general insurance
1. Health insurance
Health insurance provides safety from out-of-pocket expenses while dealing with any medical emergency. A general health insurance plan is an indemnity plan that pays for medical expenses up to the sum insured in policy. While you can avail a personal health policy, family based plans provide coverage to all the members of your family.
2. Motor insurance
Motor insurance covers your vehicles against accidents, damage, fire, theft and so on. This form of insurance comes in two forms – 0 Debt and third-party. A 0 debt motor insurance policy provides a complete safety to your vehicle against damages caused due to flood, fire, riot, etc and also offers the rider personal accident coverage along with third-party liability.
On the other hand, a third-party motor insurance only assures liability against the damages suffered by a third-party in case of an accident caused by vehicle insured. It won’t cover any damages to your vehicle. As per the Motor Vehicles Act, 1988, it is strictly recommended to owners for every vehicle on the road to have third-party insurance.
3. Home insurance
As the name suggests itself, a home insurance policy protects your home and its belongings from the damages suffered due to natural disasters. Some home insurance policies also provide coverage for temporary living expenses in case you are living on rent, due to your home undergoing renovation.
4. Travel insurance
In case you are travelling abroad, a travel insurance will protects you against losses suffered due to the loss of baggage, delays in flight or trip cancellation. In some cases, if you are admitted in hospital for treatment while travelling, the travel insurance will also cover your hospitalisation.
Difference between life and general insurance
Life and general, both are insurance contracts but both serve different purposes in our lives. While we can protect the financial stability of our families and also ensure security to our future through a life insurance policy, the General Insurance protects us from an event which has financial implications and reimburses us the benefits on occurrence of the event for which the policy has been taken.
- Life Insurance is a contract which ensures your life risk and also works as an investment avenue. Whereas, General Insurance is a contract of indemnity which promises to cover your losses.
- In Life Insurance, the sum assured along with the benefits is paid either on the demise of the policy holder or on maturity of the policy. On other hand, in General Insurance, the amount of actual loss or claim is reimbursed on the event against which the policy has been issued.
- Life Insurance is a long term contract, some policies even run till such time you are alive. On contrary, General Insurance is a short term contract, generally for one year and needs to be renewed every year or on expiry.
- Through certain Life Insurance policies you can also invest and assured hefty returns in the long term apart from securing your life. On other hand, in General Insurance, the amount payable is confined to the losses suffered or the maximum cover amount of the policy. If there is no claim during a year, the premiums are not returned to the policy holder; therefore, there is no savings component attached to the General Insurance policy.