What is the type insurance?

Insurance is one of the cornerstones of financial planning. It covers you, your dependents and your assets 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 for getting coverage of a pre-determined amount for any damages suffered.

However, depending on what your insurance covers, they are classified as life and general. In this article, we will explain both these types of insurance and their various aspects.

What is General insurance?

General insurance covers non-life assets - such as your home, vehicle, health, travel – from floods, fire, thefts, accidents and man-made disasters.

Types of general insurance

Here are different types of general insurance.

1. Health insurance

An essential risk mitigating tool, Health insurance prevents out-of-pocket expenses while dealing with a medical emergency. A general health insurance plan is an indemnity plan that pays for hospitalisation expenses up to the sum insured. While you can avail of a standalone health policy, family floater plans provide coverage to all the members of your family.

Additional Read: Health Insurance plans available in India

On the other hand, critical illness plans are fixed-benefit plans that provide a lump sum upon diagnosis of a critical ailment and cover medical costs such as pre-and post-hospitalisation costs.

2. Motor insurance

Motor insurance covers your vehicles against accidents, damage, theft, vandalism, and so on. This form of insurance comes in two forms – comprehensive and third-party. A comprehensive motor insurance policy provides a 360-degree cushion to your vehicle against damages caused due to flood, fire, riot, etc. Along with this, it also offers you the rider or add-on benefit, a personal accident coverage and third-party liability.

On the other hand, a third-party motor insurance takes care of the damages suffered by a third party in case of an accident caused by your vehicle. It won't cover any damages to your vehicle. As per the Motor Vehicles Act, 1988, it's mandatory for every vehicle plying on the road to have a third-party insurance.

Additional Read: 5 Best Car Insurance plans to choose from

3. Home insurance

As the name suggests, a home insurance policy protects your home and its belongings from the damages suffered due to man-made or natural disasters. Some home insurance policies also provide coverage for temporary living expenses if you live on rent due to your home undergoing renovation.

Additional Read: Choose from these 7 options if looking for a Home Insurance policy?

4. Travel insurance

In case you are travelling abroad, a travel insurance policy protects you against losses suffered due to loss of baggage, delays in flight and trip cancellation. In some cases, if you are hospitalised while travelling, a travel insurance may also offer cashless hospitalisation.

Difference between life and general insurance

• Meaning and coverage
  Life insurance covers your life and also has provisions to provide a savings and investment avenue. Savings here mean the benefit you receive on maturity. For example, if the policyholder outlives the policy period, he or she can get back the premium paid over the years. General insurance is a contract of indemnity covering non-life assets. It is a promise to make good on your losses, but with no savings or investment avenue, i.e., no part of the premium can be reimbursed if the claim is not made.
• Purpose
  Life insurance gives a payout in case the policyholder dies. In contrast, in case of a general insurance, payouts are made in an unexpected loss such as an accident or a theft or a sudden liability.
• Term of contract and payment
  Life insurance is a long-term contract and requires you to pay the premiums in monthly instalments. Meanwhile, general insurance is a short-term contract to be renewed every year and requires you to pay the entire premium on renewal.
• Payment of claim
  In case of life insurance, the insurable amount is paid on the event's occurrence or on the policy's maturity. For general insurance, financial losses are reimbursed when an uncertain event occurs.
• Policy value
  Life insurance can be done for any value based on the policy holder's premium. In general insurance, the amount payable is restricted to the liability incurred or actual loss suffered, irrespective of the policy amount.

What is life insurance?

As the name suggests, life insurance covers your life. In case of the policyholder's premature demise within the policy term, the insurance company pays the sum assured to the nominee. One of the essential financial instruments, life insurance, helps your family stay financially independent, square off liabilities taken in the form of loans, maintain the lifestyle provided, and keep essential goals on track.

Types of life insurance

Here are types of life insurance.

1. Term life insurance:

Term insurance is the simplest form of life insurance available in the market. A pure protection plan, term insurance offers extensive coverage at an affordable premium. A 30-year-old non-smoking male can opt for a term plan providing a coverage of Rs. 1 crore for a policy term of 30 years by paying a nominal premium. Term plan gives you the flexibility to choose a sum assured 15-20 times your annual income.

It pays your nominee the sum assured in case of your demise within the policy term. The insurance proceeds received help your family to meet daily expenses and pay off debts. Note that pure term plans have no maturity benefits. It means, in case you survive the policy term, you don't get these benefits.

However, of late, insurers have come up with the return of premium term insurance plans that return all the premiums paid if you survive the policy term. But these plans are slightly more expensive than pure term plans.

2. Endowment plans

Weaving insurance and investment in a single product, endowment plans offer life cover and build a corpus for essential life goals. A certain portion of the premium goes towards the sum assured, while the other portion is invested in low-risk avenues. In case of your demise during the policy term, your nominee gets the sum assured.

In case you survive the policy term, you get the sum assured as maturity amount along with the accumulated bonuses. Thus, endowment plans fulfil the dual needs of insurance and investment.

3. Money-back policies

Money-back policies are similar to endowment plans, except they pay a certain amount at pre-defined intervals during the policy term. For instance, a money-back policy for a term of 15 years may pay a certain amount at the end of the 5th and 10th years of the policy term. On policy maturity, it pays the maturity benefits along with the accumulated bonuses.

4. Unit linked insurance plans (ULIPs)

Combining insurance and investment in a single product, ULIPs offer life protection and the opportunity for capital appreciation by investing in various funds of varying degrees of risk. Like endowment policies, in ULIPs a certain portion of the premium provides life cover, while the other is invested in markets to earn returns.

Additional Read: Step-by-step guide to choosing a ULIP

Every ULIP has underlying funds belonging to different asset classes such as equities, debt and hybrid where it invests to generate returns. ULIPs offer partial withdrawal after the end of the lock-in period (5 years) and provide a switching facility whereby you can switch from one fund to another. This facility comes in handy when you are nearing your goal, wherein you can switch from an aggressive fund to a debt fund.

5. Whole life insurance

As the name suggests, whole life insurance offers you coverage for your entire life. The policy term for whole life insurance plans extends up to 100 years and as long as the premiums are paid, the policy's benefits are kept intact.

If the policyholder survives the policy term, then he/ she gets the maturity benefits. If you want to remain insured throughout your life, whole life insurance plans are a good choice to make.

The table below summarises the major differences between life and general insurance:

Both life and general insurance are needed to cover all aspects of your life comprehensively.

Editorial Note: We earn a commission from partner links on Forbes Advisor. Commissions do not affect our editors' opinions or evaluations.

Life is full of surprises. While some are exhilarating, others are devastating emotionally and financially, like a car accident or a kitchen fire. That’s why there are many types of insurance to help after unexpected disasters.

To help you sort through your options, here are the main types of insurance policies.

Auto Insurance

Driving without auto insurance is against the law in almost every state. Not only is it illegal to drive without coverage, but it could significantly cost you if you get in an accident, especially if you’re at fault. Fortunately, several types of car insurance can pay for vehicle damage and injuries after an accident:

• Liability coverage. This type of car insurance pays for property damage and injuries you cause to others if you’re at fault for an accident. Liability car insurance also pays for your legal defense and judgments or settlements if you’re sued because of a car accident. States (except New Hampshire and Virginaa) require a minimum level of liability insurance to drive legally.
• Uninsured/underinsured motorist (UM) coverage. If an uninsured or underinsured driver strikes your vehicle, this coverage pays for you and your passengers’ medical expenses. Uninsured motorist coverage can also pay for lost wages and compensate for pain and suffering. Some states require UM coverage. And in some states UM coverage can also cover your car damage from the uninsured/underinsured driver.
• Personal injury protection (PIP). Regardless of who was responsible for an accident, PIP insurance can cover injuries to you and your passengers. This coverage may also reimburse you for lost wages, rehabilitation costs and services like child care you can longer perform after being injured. Many states require PIP, but it’s optional in others, and in some states it’s not available.
• Medical payment coverage. MedPay coverage helps pay for medical expenses for you and your passengers if you’re injured in an accident, regardless of fault. Coverage amounts are typically low, usually between $1,000 and $5,000.
• Comprehensive and collision coverage. These coverage types work together to pay for damage to your vehicle. Collision insurance pays to repair or replace your car after an accident, no matter whose fault it was. Comprehensive insurance covers theft and damage to your car due to floods, hail, fire, vandalism, falling objects and animal strikes. Collision and comprehensive coverage are often sold together and are optional. However, if you finance your car, your lender will require you to buy it. The same goes for car leases.

Related: Best car insurance companies

Home Insurance

Unlike auto insurance, no state law stipulates that you must have homeowners coverage. However, if you financed your home, your lender will usually require coverage to protect their interest in your property. This way, if your home is damaged or destroyed, you have funds to rebuild and won’t walk away from your mortgage.

Even if you don’t have a mortgage and paid for your home outright, you’re responsible for repairs or replacement costs if something damages or destroys your home and you don’t have home insurance. It’s wise to buy a home insurance policy.

Home insurance policies wrap up several types of coverage, including:

• Dwelling coverage. From your roof to your floors, dwelling coverage protects the structure of your house from unexpected events like fire, wind, theft or vandalism. This type of coverage also pays to repair or replace structures attached to your property, such as a garage or deck. Your dwelling coverage amount should equal the cost of rebuilding your house.
• Personal property coverage. This type of coverage protects your personal belongings, such as furniture, appliances and clothing. Problems covered include theft, fire and explosions. Coverage for personal property is usually set at an amount between 50% and 70% of your dwelling coverage. You can usually buy more coverage if you need more.
• Other structures on the property. Structures on your property like a tool shed or fence are covered under this type of coverage.
• Liability coverage. Liability insurance pays for injuries or property damage you accidentally cause to others. Additionally, liability home insurance covers your attorney fees if someone sues you. So, if a visitor falls on your front steps, liability coverage can pay for their medical bills and your lawyer fees. The amount of your liability insurance should equal your net worth or what could be taken from you in a lawsuit.
• Additional living expenses. If you are temporarily displaced from your home because it’s been damaged by a problem covered by your policy, additional living expenses coverage pays extra costs such as for meals and lodging.

Remember that a standard home insurance policy doesn’t cover damage from floods or earthquakes, but separate insurance is available for these problems.

Related: Best homeowners insurance companies

Renters Insurance

If you don’t own a home, that doesn’t mean you don’t need insurance. Renters insurance helps you replace your belongings such as electronics, furniture, and clothing if they’re stolen or damaged. Problems covered include fire, tornadoes, explosions and more.

Without coverage, you would be responsible for replacing all of your stuff if your rental goes up in flames. While your landlord’s insurance will cover damages to the structure of a rental, it doesn’t cover tenant property. In some cases, landlords will require proof of coverage to rent a unit.

Renters insurance includes:

• Personal property coverage. This coverage reimburses you if your stuff (furniture, clothing, dishes, etc.) is stolen or damaged by an issue like a fire.
• Liability coverage. If you’re liable for someone else’s injuries or property damages, this coverage can pay for the cost involved. For example, if someone falls in your apartment due to your negligence, liability insurance can pay for their medical bills.
• Additional living expenses coverage. If your rental is damaged or destroyed by a problem covered by the policy, making it uninhabitable, this coverage will pay for your extra costs while you can’t live at home.

Related: Best renters insurance companies

Umbrella Insurance

Auto, home, and renters insurance come with liability coverage that protects you and your family’s assets from lawsuits brought against you. But every policy has liability limits. If you have substantial assets, your homeowners, renters or auto liability insurance may not be sufficient if you lose an expensive lawsuit.

Umbrella insurance can provide additional liability insurance if the unexpected happens and you’re liable. For example, let’s say someone sues you for $500,000 of medical bills after tripping on your sidewalk and injuring their back. If your home insurance liability limit only goes up to $300,000, you’re responsible for the remaining $200,000. Umbrella insurance would cover this extra cost.

Life Insurance

If anyone depends on you financially, finding the best life insurance for your situation is essential. Forty-four percent of U.S. households would face financial hardship within six months if the primary wage earner died—and for 28%, it would be just one month—according to LIMRA, an industry-funded research firm. Life insurance is one way to replace your income if you die unexpectedly.

Life insurance policies usually fall into two main buckets: term life insurance and permanent life insurance.

Term life insurance

Term life insurance lets you lock in rates for a particular length of time, like 10, 15, 20 or 30 years. During this time, your premiums are level. Once the level term period ends, you can typically renew the policy on a yearly basis but at a higher cost each time.

If you want to cover a specific financial obligation, like the years of college or a debt, term life insurance may be a good fit for you. Term life insurance is usually the most affordable type of life insurance.

Permanent life insurance

Permanent life insurance can provide lifelong coverage. In addition to the death benefit, permanent life insurance includes a cash value component. If the cash value builds, you can access the money by taking a loan or withdrawing funds. If you decide to end the policy, you can take the cash value of the policy (minus any surrender charge).

Consider permanent life insurance if you want to build cash value to supplement retirement savings or to provide a death benefit for someone who will rely on you financially for a long period. Permanent life insurance is more expensive than term life insurance.

Types of permanent life insurance include whole life insurance, universal life insurance, variable life insurance and burial life insurance.

Related: Best life insurance companies

Health Insurance

Medical bills are one of the frequent causes of financial hardship in America, according to the American Public Health Association. Even if you’re young and healthy, a stay in the hospital could cost you about $30,000 for three days, according to Healthcare.gov. If you’re uninsured, that could wreck your finances.

You can usually get a health insurance plan through your employer. If your employer doesn’t offer health insurance or if you’re unemployed, you can shop for health insurance plans through the federal health insurance marketplace. Health insurance plans from the federal marketplace can provide subsidies if you meet income and eligibility requirements.

Or you can buy health insurance by contacting health insurance companies directly or going through a health insurance agent or broker.

If the monthly premiums seem unaffordable, look into costs for a high deductible health plan. With this type of coverage, you must pay a higher deductible before coverage starts, but it will lower your monthly health insurance cost.

In addition, you can combine a high deductible insurance plan with a Health Savings Account, so you can stash away tax-free dollars to pay for future medical costs.

Typically, you can buy health insurance only during open enrollment periods specified by the health insurance companies selling them. Open enrollment for marketplace plans is usually from Nov. 1 to Dec. 15, though some states extend the deadline.

Exceptions to the open enrollment period are allowed under certain circumstances if you’ve had a recent life-changing event, such as getting married or having a baby.

Disability Insurance

You might think you need disability insurance only if you have a job involving dangerous activities. But most disabilities aren’t work-related. Arthritis, cancer, diabetes and back pain are among the most significant causes of disabilities, according to the Council for Disabilities Awareness. That’s why it’s wise to consider disability insurance as part of your financial plan.

If you become sick or disabled, leaving you unable to work, disability insurance supplements a portion of your income. It typically replaces 40% to 70% of your base income and usually has a waiting period before coverage kicks in and a cap on how much it pays out monthly.

Aside from qualifying for Social Security disability benefits, there are two main ways to get disability insurance:

• Group disability insurance through work
• Individual disability policies that you purchase on your own

Long-Term Care Insurance

Adults turning age 65 have a 70% chance of needing long-term care at some point, according to the Department of Health & Human Services. Whether it’s in-home assistance to help with everyday tasks or an extended stay at a nursing home, most seniors will likely need assistance at some point in their lives. And long-term care isn’t cheap. It costs an average of $9,000 per month to stay in a private room in a nursing home, according to Genworth, which sells life insurance and long-term care insurance.

Long-term care (LTC) insurance can help pay for expenses such as in-home care, adult day care or nursing home stays. The best time to buy long-term care insurance is when you’re in your 50s or 60s. Buying coverage during this age range is usually the most cost-effective time to buy. As you age, the cost of LTC insurance will increase.

Be sure to research this product thoroughly before you buy it. In recent years policyholders have been surprised by large premium increases that have made the insurance unaffordable for many after they bought it. The Congressional Research Service has an overview of long-term care insurance.

If you’re buying life insurance, you may be able to add long-term care coverage to your policy as a life insurance rider or buy a policy that combines life insurance and LTC coverage.