Difference Between Life Insurance and Health Insurance
Life insurance vs. health insurance—what should you choose? Both are essential forms of insurance, yet they serve important and distinct purposes. Life insurance provides a financial safety net for your loved ones if you pass away, helping them cover expenses like outstanding debts or daily living costs. Health insurance, on the other hand, focuses on covering medical expenses so you’re not left footing hefty hospital bills on your own.
In this blog, we’ll compare life insurance and health insurance so you can decide whether you need one or both policies for comprehensive financial protection. It’s essential to understand the difference between life insurance and health insurance before making your decision. Let’s explore in detail.
What is Life Insurance?
A life insurance policy is a contract that provides a monetary payout to the family members of the policyholder upon the policyholder’s death during the policy period. The main purpose of a life insurance policy is to protect the financial future of your family members when you pass away unexpectedly. The monetary payout they get can help them overcome financial difficulties (such as loan repayment or maintaining their current lifestyle) that may arise when you pass away. Some life insurance policies also help you create wealth, as they have an investment component in them. Life insurance is very useful for those who have financially dependent family members.
Benefits of Life Insurance
You can enjoy these benefits if you have a life insurance plan:
1. Protection: The life cover offered by life insurance policies (when you pass away during the policy period) can help your family members overcome financial difficulties (such as loan repayment or maintaining their current lifestyle) that may arise after you pass away. Essentially, life insurance policies help in securing the financial future of your loved ones. By having such a policy, you get the peace of mind knowing that your family has financial protection upon your death.
2. Investment: Not just a life cover but certain life insurance policies, such as endowment plans and unit linked insurance policies (ULIPs), help you create wealth through their investment component. So along with financial protection for your family, you also get the chance to grow your money.
3. Tax benefits: Life insurance can also help you save on taxes. You can avail tax deductions for the premium you pay towards your life insurance policy under sections 80C and 80D of the Income Tax Act, 1961. Furthermore, the maturity returns can be tax-exempt as well if your policy meets certain conditions.
What’s interesting is that the life cover payout that your family gets when you pass away during the policy period is completely tax-exempt under section 10(10D) of the Income Tax Act, 1961.
Types of Life Insurance
Life insurance policies are of many types. Here are brief explanations of the different types:
1. Term insurance: It is a simple, affordable, and pure protection insurance that offers only a life cover to help you secure the financial future of your family. It covers you for a specific period of time and does not offer any investment component that can be used to grow your money. The life cover payout is made only if you pass away during the policy duration.
2. Whole life insurance: Whole life insurance covers you till you turn 99 years. When you pass away, your family gets the life cover payout. These policies can be used for estate planning.
3. Endowment plan: This is a life insurance plan that provides returns while offering you a life cover. Unlike term plans, which pay the life cover to the family members only when the policyholder passes away, endowment plans pay the life cover when the policyholder passes away as well as when they survive the policy duration.
4. Money back plan: This life insurance plan is similar to an endowment plan, as it too offers a maturity benefit, which is offered as instalments after the end of the policy term. A portion of the sum assured gets paid over regular intervals during the policy period, and the remaining portion gets paid after the end of the policy period.
5. Child plan: This life insurance plan has an investment component aimed at building a corpus for your child (which can be used for their education, marriage, etc.) and a life cover to help secure their financial future.
6. Pension plan: This plan helps you create a financial foundation for your retirement years by offering regular income.
7. Unit linked insurance plan (ULIP): This life insurance plan offers the dual benefit of financial protection for your family, through a life cover component, as well as a chance to grow your money through an investment component.
What is Health Insurance?
Health insurance is basically a contract that covers your medical costs when life throws unexpected health issues your way, like ambulance charges, surgery fees, or even hospital room expenses. Some policies even offer a cashless facility, which means you won’t have to whip out your wallet every time you visit the hospital. Whether you’re flying solo or looking after your entire family, there’s likely a policy out there to fit your needs. It’s all about having peace of mind knowing you’ve got a safety net if a medical emergency crops up.
Benefits of Health Insurance
1. Comprehensive coverage: Health insurance covers many medical procedures and treatments; however, one needs to check what is exactly covered by reading their policy documents.
2. Cashless facilities: Health insurance policies may offer cashless facilities; that is, you don’t have to pay money from your own pocket and get it reimbursed later for your medical expenses.
3. Financial protection: Having a health insurance policy can mean that you don’t need to strain your savings if you are faced with a medical emergency.
4. Tax benefits: You can claim a deduction on taxable income for the premium paid for health insurance under Section 80Dof the Income Tax Act 1961.
Types of Health Insurance
Health insurance plans can be classified into these types:
- Individual: These plans cover the medical and hospitalisation expenses of a single person only.
- Family floater: In this the policy covers all members of the family, and the sum insured is shared by all of them.
- Senior citizens: These plans are there to cover the health and medical expenses of senior citizens; however, the premiums are high as the elderly are more prone to age-related health issues.
- Critical illness: These plans provide the sum insured when the policyholder suffers from a critical illness, such as heart disease. The sum insured can be used for the treatment costs.
- Maternity: These policies cover pregnancy-related expenses such as pre-natal and post-natal expenses.
- Top up: In such policies, the sum insured can be topped up if the base sum insured has been exhausted.
- Personal accident: In these policies, a lump sum is paid if the policyholder suffers from permanent and partial disability. If the policyholder dies, then the sum insured is given to their nominee.
- Hospital cash: These policies pay a daily allowance to help cover day-to-day expenses incurred while the policyholder is hospitalised (such as food expenses).
- Disease-specific: These plans are designed for people suffering with specific diseases.
Key Differences Between Life Insurance and Health Insurance
When it comes to life insurance vs. health insurance, it’s easy to assume they’re similar because both are forms of protection. However, they actually serve very different roles. Let’s break down their key differences so you can pick the coverage that fits your needs best.
A. Purpose
Life insurance: Life insurance is primarily about ensuring your family’s financial well-being in case you pass away during the policy period. The payout can help your loved ones maintain their lifestyle, cover daily expenses, or settle outstanding loans. This makes life insurance ideal for anyone with financial dependents.
Health insurance: Health insurance focuses on covering medical-related costs like ambulance fees, surgeries, and hospital stays so you’re not burdened by hefty bills. Unlike life insurance, it doesn’t provide a lump sum payout to support your family’s long-term financial needs.
B. Scope for Investment
Life insurance: Some life insurance policies—such as Unit Linked Insurance Plans (ULIPs)—come with an investment component. This means you can protect your loved ones while also potentially growing your money over time. It’s a unique way to combine wealth-building with insurance coverage.
Health insurance: Health insurance doesn’t offer any investment features. Its sole purpose is to help you manage hospital and medical expenses. If you’re only looking to safeguard yourself against sky-high medical bills, health insurance does the job. But it won’t help you build wealth in the long run.
C. Tax Benefits
Life insurance:
For life insurance, you can get tax benefits under sections 80C, 80D and 10(10D) of the Income Tax Act, 1961. In Section 80C, you can get tax deductions on premiums paid for the life insurance policy. In Section 80D, you can get additional deductions on the premiums you have paid if your life insurance policy has health-related riders added to it (such as a critical illness rider). Further, the life cover payout your family receives when you pass away during the policy period is completely tax exempt under Section 10(10D) of the Income Tax Act, 1961.
Health insurance:
With health insurance, you can claim deductions on the premiums paid under Section 80D of the Income Tax Act, 1961. While it doesn’t provide as many tax avenues as life insurance, it still helps reduce your taxable income by letting you deduct your health insurance premium.
By exploring the difference between life insurance and health insurance and understanding how they vary in purpose, investment scope, and tax benefits, you’ll be better equipped to decide whether life insurance, health insurance, or perhaps both are best suited to meet your financial goals.
Should You Buy Life Insurance or Health Insurance?
For a comprehensive financial plan, one should include both life insurance and health insurance. Life insurance will be there to protect your family financially when you pass away unexpectedly. Health insurance will be there to take care of your medical expenses, and both are important for financial planning. Not having a financial backup for your family’s financial future (such as term insurance) means that they can be vulnerable when you pass away unexpectedly. Not having health insurance can drain your savings when you face a health emergency, especially if it is something that is expensive.
So, there is no this is better than that over here, as both serve two different yet useful purposes.
FAQs
Q1. What is the basic difference between life insurance and health insurance?
Life insurance aims to help in securing the financial future of your family by providing them a monetary payout when you pass away during the policy period. This payout can help them overcome financial difficulties that may arise when you pass away. Health insurance helps you pay for your medical expenses (such as surgery costs, ambulance costs, etc.).
Q2. What kind of deaths are not included in the life insurance plan?
Generally, all types of deaths are covered in life insurance except:
1. Deaths caused by an event mentioned as exclusion in the policy
2. Suicide, which is covered 2nd year onwards in the policy period
Q3. Do I need both life and health insurance?
For a comprehensive financial plan, one should get both life and health insurance. Life insurance will help in securing the financial future of your family. The life cover payout can help them overcome financial difficulties that may arise after your demise (such as loan repayment or maintaining their current lifestyle).
Health insurance will help you cover your medical expenses (such as surgery charges, ambulance charges, etc.).
Q4. Is it possible to cancel a life insurance policy at any time?
Yes, a life insurance policy can be cancelled either during the free-look period or by surrendering it after the free-look period ends. However, keep in mind that cancelling your policy will result in losing all the benefits associated with it. It’s important to weigh your options carefully before making this decision.
Tax Disclaimer: Tax benefits & exemptions are subject to conditions of the Income Tax Act, 1961 and its provisions and tax Laws are subject to change from time to time. You are requested to seek tax advice from Chartered Accountant or personal tax advisor with respect to personal tax liabilities under the Income-Tax law
Disclaimer: HDFC Life Insurance Company Limited (“HDFC Life”). CIN: L65110MH2000PLC128245, IRDAI Reg. No. 101. Registered Office: Lodha Excelus, 13th Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalaxmi, Mumbai 400 011. Email: [email protected], Tel No: 022-68446530. Available Mon-Sat from 10 am to 7 pm. The name /letter 'HDFC' in the name/logo of HDFC Life Insurance Company Limited (HDFC Life) belongs to HDFC Bank Limited and is used by HDFC Life under licence from HDFC Bank Limited.
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