What is difference between general insurance and life insurance?

Answer 1

Life Insurance

• Life insurance transfers the financial risks associated with your death to an insurance company. You pay the insurance company a premium payment, and the insurer gives you a death benefit promise in return. When you die, the insurer promises to pay a sum of money outlined in the life insurance policy contract. Life insurance comes in a variety of types that may mature in one year and require that you renew your policy every year, or they may mature in 100 years so that you never have to renew your policy contract in your lifetime.

  Life insurance may provide just basic death benefit protection (i.e. term life insurance) or it may provide a death benefit with an equity value, called a cash value, which is a cash reserve that builds up against the death benefit of the policy to cover the costs associated with paying out the future death benefit claim.

General Insurance

• General insurance transfers risk away from you and your family to an insurer for personal matters other than life insurance. For example, property and casualty insurance transfers the risk of damage to your personal property to an insurance company so that you don't have to pay out of pocket for any property damage covered under the terms of the insurance policy. Health insurance provides a way to transfer the financial cost of certain health risks away from you to an insurance company so that an illness does not financially ruin you. Like life insurance, these policies require the payment of premiums to an insurer. Unlike life insurance, however, these kinds of policies are usually indemnity policies. With life insurance, a set amount of money is paid out at your death, regardless of the costs associated with your death. With general insurance, such as property and casualty or health insurance, the amount of money is limited to the risks specifically named in the policy and to the damage actually incurred. Health insurers, for example, only pay for the medical costs you actually incur, instead of a lump sum of money unrelated to your medical bills.

Benefit

• The benefit of both types of insurance is that the policy allows you to engage in financial activities you would otherwise not be able to afford. For example, life insurance allows you to take out loans and assume debt without worrying about the future financial risk of not being able to pay off the debt prior to your death. This, in turn, may allow you to buy a home, take a vacations or start a business when you otherwise may not feel comfortable doing so. Property and casualty insurance allows you to own property without having to save up enough money to replace any property that is damaged or destroyed over time.

Expert Insight

• When purchasing both life and general insurance, you should only buy what you need. Assess your financial goals and your insurance needs, and buy insurance accordingly. You may not need life insurance to provide your spouse with 20 years of future income after you die, for example, if your spouse is financially independent. Likewise, you don't need to insure your property for more than its replacement value.