Life and Non-Life Insurance
Concept of life insurance
Life insurance is a contract between an insurer and a policy holder in which the insurer guarantees the payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company promises the death benefit in consideration of the payment of a sum of money, that is the premium, by the insured.
Types of insurance
1. Life insurance
Life insurance is a contract whereby the insurer, in consideration of a premium paid either as a lump sum or as periodical installments, undertakes to pay (either on the death of the insured or on the expiry of a specified number of years, whichever is earlier) an annuity or a specified amount. Examples include whole life plans, endowment assurance plans and unit linked plans.
2. Non-life insurance
Non-life insurance is a contract whereby the insurer, in consideration of a premium paid by the insured, agrees to indemnify him for the financial loss suffered due to an adverse event which is covered by the terms of the policy. The main forms of non-life insurance are:
- Marine insurance: a contract of insurance under which the insurer undertakes to indemnify the insured, in the manner and to the extent agreed, against marine losses incidental to a marine adventure. Example: loss or damage to the ship, cargo or freight.
- Fire insurance (the source labels this heading "life insurance", but the definition given describes fire insurance): an agreement whereby one party, in return for a consideration, undertakes to indemnify the other party against the financial loss which the latter may sustain by reason of certain defined subject matter being damaged or destroyed by fire or other defined perils, up to an agreed amount.
- Property insurance: purchased by individuals and organizations to protect against direct or indirect loss to property. The perils that cause loss are insured against under a fire or property insurance policy. An alternative to named-peril cover is to provide all-risk coverage.
- Liability insurance: purchased by individuals and businesses to protect against financial loss because of legal responsibility for bodily injury, property damage and personal injury. There is no upper limit on the damages that may be awarded.
Life insurance compared with non-life insurance
| Basis | Life insurance | Non-life insurance |
|---|
| Subject matter | Human life | Property and liabilities other than human life |
| When it pays | On the death of the insured or on the expiry of a specified number of years | Indemnifies the financial loss suffered from an adverse event |
| Consideration | Premium, as a lump sum or as periodical installments | Premium paid by the insured |
| Examples | Whole life, endowment, unit linked plans | Marine, fire, property, liability insurance |
(This comparison is drawn from the definitions stated in the source.)
Types of life insurance
Human life cannot be measured in money value, but the financial loss arising from death can be compensated by purchasing a life insurance policy. The main types of life insurance policy are described below.
1. Term life insurance
Term life insurance is designed to provide protection if the insured person dies during a specified period of time. It accounts for a substantial portion of the face amount of all life insurance purchased by individuals each year. There are three types of term policy:
- Straight term life insurance: issued for a fixed period of time and it does not have renewal features. The policy holder pays a single premium at the outset plus a medical examination fee.
- Renewal term life insurance: a term policy that can be extended further after the expiry of the given term. The premium is increased at each renewal and is based on the insured's attained age.
- Convertible term life insurance: a policy that provides the option of converting a term policy into a whole life insurance policy without any penalties or having to undergo a medical exam.
2. Whole life insurance
This is the oldest and most traditional form of insurance. It is issued for the life of a person. Premiums are payable throughout life or for a certain period of time. The insurance is payable only after the death of the insured to his or her nominee. It can be divided into three categories:
- Ordinary whole life policy: the policy holder pays premium for their whole life at a set price and interval. The policy holder cannot get the policy amount during his or her lifetime; the nominee gets the policy amount after the insured's death.
- Limited payment whole life insurance: the insured pays premium only for a set period, either a number of years or up to a specific age. Once that target is reached, premium is no longer required, but the benefit is paid after the death of the insured to the nominees.
- Convertible whole life insurance: when the whole life policy can be converted into another type of life policy, it is called a convertible whole life policy. Normally it is converted into an endowment life policy. This policy is advantageous for a person who currently has low income that is expected to increase in future.