Insurance transfers risk from you to another company, called an insurance company. This is accomplished by you purchasing an insurance contract. For a monthly, quarterly or annual fee called a "premium," the insurance company takes on a particular risk and ensures that money is available in the event that the insured event occurs. Two types of insurance people commonly purchase are life insurance and general insurance.
Life insurance is a non-personal insurance contract. This means that the policyholder and the person being insured do not have to be the same person. General insurance is always a personal contract where the insurance company contracts with you directly for insurance protection.
Both life insurance and general insurance accept premiums in exchange for insurance benefits. Insurance premiums are invested into bonds or bond-like investments that produce stable and consistent returns for the insurance company. The investments, plus premium payments, also ensure that the insurance company can pay the promised benefits that are outlined in the insurance policy. When you need to file a claim, both types of insurance require a claim form for you to fill out. The payment of benefits, and the amount of the benefit that is payable, are always spelled out in your insurance contract.
Life insurance insures your life or the life of someone that you have an economic interest in, like your spouse, children, siblings or business partners. When the insured individual dies, the life insurance policy pays a death benefit that is fixed. This is called a valued contract. A valued contract pays a fixed sum of money, regardless of the nature of the loss insured by the contract.
General insurance insures homes, automobiles and other personal property. This type of insurance is sometimes referred to as "property and casualty" insurance. General insurance is indemnity insurance. Indemnity insurance pays just enough money to you to repair or replaced the insured property. For example, your homeowner's insurance may cover your entire home and the contents of it. However,if your roof is damaged in a storm, the policy only pays enough to repair the damage.
The benefit of life insurance is that it pays off any financial obligations you have left after you die. It can pay more than that, however, because life insurance pays a fixed amount. Death benefits can be used to create wealth for the surviving beneficiaries, or they can be used to replace the primary income earner's salary for a surviving spouse.
General insurance is beneficial in that the insurance ensures that, almost regardless of the damage done, that the property will be repaired or replaced. While general insurance generally has a maximum payout determined by the value of your property, it does not pay a fixed amount, so you won't have to guess at how much insurance you need to purchase.
Both types of insurance are necessary to protect your life and your property. They each serve a different function and fill specific roles in your insurance plan. When buying life insurance, only buy enough insurance to cover your current and expected future financial liabilities. When purchasing general insurance, the maximum coverage should not extend beyond the total replacement value of your property.
- "Life Insurance"; Kenneth Black, Jr., Harold D. Skipper, Jr.; 1994
- "Practicing Financial Planning for Professionals (Practitioners' Edition), 10th Edition"; Sid Mittra, Anandi P. Sahu, Robert A Crane; 2007
- Photo Credit Hemera Technologies/AbleStock.com/Getty Images
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