There are many differences between health insurance and life insurance, however, it has to be understood based on the context in which it is mentioned. Life insurance and health insurance may appear to be similar as they both provide coverage to the person insured against unexpected incidents. However, the two are totally unlike each other, in terms of the kind of coverage they provide. A life insurance provider pays the insured person’s nominee a fixed sum in the event of the death of the person, so it covers the insured person against the risk of death in return for a fixed amount that the insured pays to the company every month. The coverage that you will get with life insurance is against the likelihood of death. Therefore, the nominee will get the payment.
On the other hand, health insurance is a contract between the insurance provider and the insured person against the possibility of medical expenses and hospitalisation. The insurance company will pay for the expenses incurred for the treatment of the insured individual in return for a fixed premium. However, there is no payout on death. Many insurance providers offer reasonable premiums for both, life Insurance and health insurance together with other attractive benefits. Hence, you must do a comprehensive research before purchasing an insurance.
You are likely to be confronted with three options when you purchase a life insurance policy:
- Term Insurance
- Investment Linked Policies
- Life Insurance (endowment)
- Direct Purchase Insurance
Term insurance is the oldest form of insurance which comes with a fixed expiry date. Here, your nominees will be paid an agreed upon sum if you suffer from permanent disability and critical illness (conditions applied) that leaves you in no condition to earn or your death during this time. Once a term insurance expires, you will no longer get any amount back. Hence, the premium amount is lower than other forms of life insurance policies. Another drawback of term insurance is, if you want further coverage beyond the maturity period, you would find that the coverage is quite costly. Health insurance on the other hand covers you individually by taking care of all medical and hospital bills in return for a premium that you will have to pay monthly or annually.
Most people purchase term life insurance when they feel that their life is at greater risk over a short period of time. Like term insurance, a health insurance policy also has a fixed period during which your medical expenses are covered and you would not get any lump sum amount once the period of coverage gets over.
Investment Linked Policies
Investment Linked Policies are life insurance policies that also double as investments. Your annual or monthly premiums are separated into two parts. One part of the premium will provide you with the cover in case of your death during the period of the policy. The other part will be turned into an investment plan, like bonds, stocks or mutual funds. Investment linked policies are very popular, as they provide you with both, savings and protection for your family. The savings will probably come to your rescue for the payment of your child’s college tuition fees or it will add to your retirement funds. Investment linked policies usually charge commission and other fees.
Health insurance is not an investment option and will come to your aid only when you suffer from a an accident or sickness. The cost of both, a health insurance policy and a life insurance policy to a large extent depend on your health and age and it will be cheaper when you are young and healthy.
Endowment Plans/Whole Life Insurance
With endowment plans or whole life insurance, you will get a lump sum amount when the plan expires. If you suffer from a serious illness or disability (conditions applied) that leaves you in no condition to earn or in case of your death within the maturity period, your dependants will be paid a lump sum amount. Normally, you would have to pay more in terms of premium every year for whole life insurance. Usually the maturity period for an endowment plan varies from 10 to 30 years. It may also be pegged to you age, for instance, when you reach the age of 60.
Most endowment policies would also comprise a saving component within the policy. If you decide to give up the policy, there would be a lump sum amount provided by the policy. It is this lump sum amount that entices many people to buy whole life insurance. The surrender amount that you will get will be less than the death benefit payout.
The lump sum amount that you get at the end of your term also varies depending on whether you have taken a par policy or a non-par policy. In a par policy, there are two components- a variable bonus and the lump sum amount. The lump sum amount will be less than the sum of premiums that you have paid unlike a fixed deposit, you are getting charged for protection. In a non-par policy, you are only paid the lump sum amount upon maturity or death.
Direct Purchase Insurance
Direct Purchase Insurance is a combination of whole life and term insurance products that come with total and permanent disability coverage and optional critical illness riders that you can purchase from life insurance providers, either through their websites or customer service centres.
Life insurance whether it is term or endowment plan, is essential and worth spending money on. At the same time, we must realise that all-inclusive financial planning is a lot more than just picking the right kind of life insurance, or the amount we are paying on life insurance policies. Health insurance and life insurance are intended to cover two different situations, so it is not like you have to pick one or the other, instead you have to decide on it by keeping the two issues separate.