How life insurance differs from general insurance

General insurance is sometimes also known as ‘non-life insurance.’ In terms of how these two different types of policies are similar and different to general insurance, purists would reasonably argue that these are, in effect, two quite different industries. It is unusual although not unprecedented for individual professionals to cross over from one to the other. The two are similar in that both are reliant on premium income, invest that income, and make provision for claims payment and administration. They differ however in terms of the long-tail nature of the policy with general insurers needing to manage their business on a much shorter cycle of time. Both may also be subject to misdescription, either innocent or fraudulent, in that each type of insurer is dependent on having an understanding of material facts (‘facts which would influence the underwriter and the terms or pricing of the policy’). Both may also potentially be subject to fraudulent behavior at the point of claim. Such behavior is perhaps more apparent in general insurance but can also show itself in life insurance. One version of life insurance is that of funeral insurance, where for a small premium the insurer funds the cost of funeral expenses. This type of funeral or ‘burial’ insurance is very old and there is some evidence that the Greeks and Romans even had a type of provision through ‘benevolent societies.’ In more recent times the so-called Friendly Societies also had cheap cover available. Burial insurance has also shown itself in the micro-insurance market. Micro insurance is a form of insurance designed and distributed for low income families in accordance with their wealth and conditions. With administration costs being necessarily low, claims are often paid based on the evidence of a birth and death supported by appropriate documentation, spawning a new industry of forged birth and death certificates. Both non-life and life insurers are vulnerable to major events. In the case of property, the impact of a major weather incident will give rise to many damage claims of varying types, complexities and values. In the case of life insurers, they too are concerned with major incidents especially where there has been loss of life. Generally, their greatest concerns are of an entirely different nature, typically events such as pandemics which cause widespread death. Examples of this might be Asian influenza or Ebola, although fortunately neither of these has proved to be a major problem for insurers (or the general public) in recent times.

The basis of life insurance is simply that in the event of the death of a person insured under the contract, a payment is made to an agreed beneficiary. Other versions of this exist, typically critical illness. The ‘life-based’ insurance policy often falls into one of two types – a protection policy which pays out a lump sum, or alternatively an investment policy. In an investment policy the intention is to grow the amount contributed either by way of regular payments or a
lump sum, and which through shrewd investment on the part of the insurer will result in the growth of the capital amount contributed. The insurer calculates the price of insurance taking
into account the costs to be paid, plus administrative expenses.

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