Types of Insurance

Insurance is broadly divided into two major categories: life insurance and general insurance, and general insurance is further divided into several specific branches depending on the nature of the risk covered.

Life insurance

Life insurance covers the risk attached to human life itself — the risk of premature death, and also the risk of living long enough to outlast one's savings. Under a life policy, the insurer promises to pay a fixed sum, called the sum assured, either on the death of the insured or on the insured surviving to the end of a specified period, whichever happens first, in exchange for premiums paid over the term of the policy. Because a human life cannot be assigned a precise market value, life insurance operates on the basis of an agreed sum assured rather than strict indemnity, and it is therefore treated as an exception to the principle of indemnity described earlier.

General insurance

General insurance covers financial loss to property and other insurable interests other than human life, and it strictly follows the principle of indemnity — the insured recovers only the actual financial loss suffered, never more. Its main branches are:

• Fire insurance — covers loss or damage to property (buildings, stock, machinery) caused by fire and certain allied perils such as an explosion or a lightning strike.
• Marine insurance — covers loss or damage to a ship (hull) and its cargo while in transit by sea, and in modern practice is often extended to cover inland transit by rail or road as well.
• Health insurance — covers the cost of medical treatment, hospitalisation and related expenses arising from illness or accidental injury to the insured.
• Motor insurance — covers loss or damage to a motor vehicle and the legal liability arising from injury or damage caused by it to third parties; in India, third-party motor insurance covering liability to others is compulsory by law for every vehicle owner.

Life insurance versus general insurance