People & Partners Insurance CEO, Jeff Whittaker, has been asking his team to suggest topics for the People & Partners blog. This week he sheds some light on a subject that commonly confuses customers and young employees entering the insurance industry: the difference between general insurance and life insurance. An understanding of each type of insurance is fundamental whether you’re designing or buying insurance policies.
One of the youngest and brightest members of our staff recently asked me about the differences between general insurance and life insurance. A good question. Most insurance companies in the world are split between general insurance and life insurance and have separate licences.
In some countries, notably the UK, Europe and USA, they have combined (or composite) licences and are therefore able to transact both branches of insurance under the same name and licence.
These two main types of insurance are so very different, but our clients easily get confused as ‘all insurance companies are alike’ to them!
In fact there are clear distinctions between the two classes and I’ll try and clarify these below.
This is a basic principle of all Insurances. You need to have a financial interest in the person, thing or event to be covered in order for it to be a valid insurance cover.
Before 1774 and the Life Assurance Act in the UK (where life insurance first started) it was possible to insure the life of anyone. You didn’t even need to be related to the person! Say you saw a public figure such as a rich businessman or a great actor or even a prominent politician – you could insure his or her life just because they looked a little unwell! You cannot do this now, but you can have an unlimited value on your own life – say 1 billion US dollars (providing you can pay the premiums!).
As opposed to life insurance, general insurance always required a financial interest in the object, person or event.
This is also one of the basic principles of Insurance. However it does not apply to life Insurance. Indemnity means putting the person with a loss back in the same position as before the loss – no more, no less. The latter is not easy but that’s the basic principle.
With life Insurance there is no limit on how you value your life. So there can be no ‘Indemnity’.
This is another basic principle of Insurance, which only applies to contracts of Indemnity. Contribution is where you have more than one policy covering the same object, person or thing.
Thus if I had car insurance in Cambodia with three different insurers, and I had an accident, I can claim to all three insurers, but they will only pay me one third each! I cannot make a profit on a claim in this way with general Insurance.
However, I can claim on three life policies with different companies on maturity of the contract or in the event of my death. In fact at one stage in my life I counted I had 24 life policies (mainly for investment purposes) in force!
I only have three left now.
This is another basic principle of insurance which applies to general Insurance but not to life Insurance, as it also follows the principal of Indemnity.
Suppose I have a claim on my fire policy and the fire was actually caused by a careless contractor doing some extension work. In law I can claim on my fire policy and also against the contractor for his Negligence. However I cannot keep the payment from the contractor because under this principle I cannot make a profit from a claim.
However, if I am in a car crash and get killed, then my life insurance pays and my relatives or estate can sue the careless driver for payment also!
Most general insurance policies are short term i.e. one year. We don’t issue 10 or 20 year policies. Most life Insurance policies are for longer than one year. Pension policies can be for 45 years or longer! Life Insurance Companies can therefore invest your premium in longer term investments (e.g. buildings) than general Insurance companies and therefore make better returns on their investment portfolios.
There are literally hundreds of different General Insurance Products around the world. Life Insurance has a lot fewer categories than general Insurance. i.e:
Mixes of these basic types of life cover constitute the whole market.
Life ‘actuaries’ use official Mortality Tables to judge the average number of deaths within a certain population of people. Different premium rates are calculated based on sex, age and general well-being. Discounts are given (e.g. non-smokers and non-drinkers).
This method of calculating premiums is not used for general Insurance. Instead, long experience of claims history in the particular markets are used (i.e. rating on experience).
Most Life Insurance Companies use armies of commission-based sales agents to sell their products, or they advertise a lot online with simple products and ‘free’ gifts such as pens.
Whereas general insurance companies usually have their own salaried sales personnel and also use professional Brokers as intermediaries. They do have some ‘agents’ on commission only, but far fewer than life Insurers.
With Life Insurance, the younger you are, the cheaper it is! It makes good sense to buy as much life insurance as you can afford as early as you can, including a start on a pension/investment type plans.
With general insurance it’s very often the other way round. For example a young person insuring a motor car is very often faced with much more expensive policies than when they are older and more mature. In some countries, insurers give big discounts for drivers over 55 as they are deemed to drive slower and more carefully!
Mostly general insurance products have a cancellation clause in them even though the usual cover period is only one year.
With life Insurance there is no such clause (unless you do not pay your premium). This is because if you developed a serious or fatal illness, life insurers cannot just cancel the policy and avoid a claim – it is for life, however long or short the period may be.
General Insurance policies always have a fair amount of exclusions, conditions and clarifications. By contrast, life insurance policies do not – suicide is a classic exclusion and maybe Aids or HIV, but very little else.
In fact the shortest policy I ever wrote was “If you die we pay” with no exclusions whatsoever (including suicide, HIV etc.).
Life Insurance policies can sometimes be ‘portable’. For instance, say you switch companies you are working for and move to a new employer. Sometimes an Insurance Company will allow you to take your exiting benefits with you to the new company’s pension scheme, rather than be paid up. This avoids the complicated situation where you have lots of policies to claim on when you retire or die.
Also say you divorce your wife and marry again. Your previous wife can keep her policy on you, and you on her, if you both wish.
This never happens in general insurance. If you sell your car or your house, the new owner will have to insure it again.
I hope this explanation shows the big differences between these two main classes of insurance. They may be very different but a good spread of insurance policies, both life and general, are what most people need.
Jeffrey J. Whittaker is CEO of People & Partners Insurance, and a veteran of the insurance industry with more than 50 years experience.