Clearing air on various types of insurance plans.
Insurance customers are often not clear about the distinction between different types of insurance products. For instance, people often confuse between accident insurance and life insurance. Several such products often overlap, leading to confusion for customers on what to buy and what is actually suitable for them.
Of the two schemes that the government announced recently, one offers accident insurance (pradhan mantri suraksha bima yojna) and the other life insurance (pradhan mantri jeevan jyoti bima yojna). Before buying a product, it is essential to know what one is getting into and what are the benefits available.
Basic definition
The basic distinction between the two insurance products is not very difficult to understand. Accident insurance will cover an individual in case of an accident, leading to death or disability. In case of death, the insurance company will pay the full sum assured, while for disability the insurer will make a part payment. This ensures that a family has financial security in case the breadwinner gets involved in an accident.
A life insurance policy, on the other hand, will cover the dependents of the individual and pay the sum assured and other benefits in case of the death of the insured, whatever be the cause of death (though abnormal death such as suicide is not covered). This is a more broadbased product in the sense it offers blanket coverage without distinguishing the cause of death to trigger the payment.
Premium:
Insurance premium depends on the extent of the risk covered. In case of a life insurance cover, this will be determined by the chance of death of an individual, which is also known as mortality risk.
When it comes to an accident insurance policy, the chances of the death of an individual due to an accident are lower than that of natural death or disability. This is why the premium of an accident insurance policy is comparatively less.
In comparison, the premium for a normal life insurance cover, which is a term insurance cover, is higher. However, the premium of a term insurance or pure insurance policy will be much less compared with a savings-cum-insurance product. In fact, the gap between the premiums for the two different products can be huge.
Overall decision:
There are often choices to be made in terms of the type of insurance one wants to buy and when to buy. It is important to look at the features of an insurance product, especially under what circumstances the payout will be made.
This will help one understand which all events does it actually cover and what kind of benefits are available. Often people just look at the premium and make the decision. This may lead to incomplete coverage. Also, the comparison itself can be misleading if one doesn’t know which products are comparable. For example, a term plan cannot be compared with a normal insurance policy, as the former will show a lower premium but the claim can be made only in the event of death. On the other hand, the premium of an accidental insurance policy may look very low, but the individual will get a payout only in case death or disability due to an accident.
(The writer is a CA and certified financial planner)
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