Difference Between Life Insurance and Health Insurance

Securing your financial future and protecting your family from unexpected events are key aspects of responsible money management. Two common safeguards that can help achieve this include life insurance and health insurance. Though people often mix them up or consider them interchangeable, they actually serve very different purposes.

Life insurance provides financial support for your family members in case you pass away unexpectedly during the active term of the policy. Health insurance plans, on the other hand, assist you in paying any medical bills you may incur in case of hospitalisation. While both provide coverage during difficult times, life insurance deals with the loss of income, while health insurance pays for treatment costs.

This blog post clearly examines the key difference between life insurance and health insurance in terms of what they cover, who requires them, and how to evaluate which one should be your top priority when making purchase decisions. Reading further will help gain clarity on choosing the right insurance plans for your financial situation and your family's needs.

What is Life Insurance?

Life insurance provides your named beneficiaries with a lump-sum payment if you pass away during the term of the policy. This death benefit can be used by your family to cover outstanding debts, fund your children's education, maintain their current lifestyle or clear any other financial obligations in your absence.

There are several types of life insurance plans available in India:

• Term life insurance: This is the most basic and affordable form. It offers financial protection for a specific timeframe, i.e. the term of the policy. It pays out the death benefit if you pass away within the term.
• Whole life insurance: Also called permanent life insurance. As the name suggests, it offers lifelong financial coverage. The premiums are higher because the coverage is longer. It also builds up cash value that you can borrow against.
• Unit Linked Insurance Plans (ULIPs): These offer both insurance and investment under a single plan. A portion of the premiums goes towards the life cover, while the remaining amount gets invested in funds of your choice. It provides both protection and market-linked returns.

People generally purchase life insurance if there are people who are financially dependent on them, like:

• Young children
• Non/low-working spouse
• Ageing parents

Having adequate life insurance ensures these dependents can still maintain their lifestyle if the breadwinner were to pass away unexpectedly. It reimburses the loss of income to the family.

What is Health Insurance?

Health insurance helps cover unexpected medical expenses like hospitalisation bills, surgery costs, day care procedures and even expenses incurred during home care treatment. These plans reimburse the policyholder's medical bills up to the sum insured limit in case they are hospitalised.

Some common types of health insurance plans are:

• Indemnity Plans: This is the most popular type of health insurance plan, which includes individual insurance as well as coverage for families called family floater plans. They have a shared sum insured, which means total claims by the family cannot exceed the total coverage amount in a policy year.
• Critical Illness Insurance: As the name suggests, this specifically covers treatment costs related to pre-defined critical illnesses like cancer, stroke, heart attack, etc. It pays out a lump-sum amount, which can be used for treatment.
• Hospital Daily Cash Policy: Rather than reimbursement for actual medical bills, this option pays out a fixed amount for each day spent in the hospital. The amount is unrelated to actual expenses incurred on treatment.

In India, health insurance plans are primarily purchased to get tax benefits under Section 80D of the Income Tax Act, 1961, as well as to leverage group insurance plans offered by employers. However, the rising cost of medical care also makes health insurance plans necessary to pay for expensive private treatment, which could wipe out one's life savings.

Core Differences Between the Two

While both life and health insurance are meant for times of crisis, they achieve completely different objectives. Let's examine this further:

Coverage

• Life insurance pays your nominees the sum assured in case of your untimely death.
• Health insurance pays your hospitalisation bills up to the maximum sum insured per policy year if you fall ill.

Policy Term

• Life insurance encourages long policy terms to cover your entire working life when dependents need you the most
• Health plans generally have annual renewal terms since long-term premium costs cannot be predicted in advance due to medical inflation risk

Savings

• Few life plans allow saving for future needs by building cash value
• Health plans generally only offer reimbursement against medical costs with no cash value built up.

Tax Benefits

• Premium paid up to ₹1.5 lakh annually qualifies for tax rebates under Sec 80C of the Income Tax Act, 1961 for select life policies.
• Up to ₹25,000 in health insurance premium for self, spouse and kids offers tax deduction under Sec 80D of the Income Tax Act, 1961. Elderly parents' coverage allows a higher limit.

Which Is More Important: Life or Health Insurance?

This is tricky because an ideal financial plan would advise you to buy adequate insurance of both types. However, in case of budget constraints where buying all essential policies is not feasible, here is how you can evaluate which one takes priority over the other for the interim:

Short-Term vs Long-Term Needs

Health insurance plans are critical for short-term protection. Hospital bills can easily run up to ₹3-5 lakhs for basic treatment, so this takes priority for immediate security.

Life insurance, however, guarantees long-term safety for dependents to maintain their lifestyle in case you are not around anymore. Hence, adequate life cover is equally important once short-term health risks are covered.

Financial Goals and Family Structure

If you are the primary breadwinner for your family or have financial dependents, opt for life cover first. This ensures their financial security is not compromised due to the loss of your earning capacity if you are no longer around.

On the other hand, if you have limited liabilities, adequate health cover should be bought first before considering income protection or savings-focused life insurance.

Health Status and Medical Inflation

If you or your family members already have existing health issues that require recurrent treatment, health plans should be prioritised. Pre-existing diseases are not covered in the first few years, so newer issues will not be covered if you develop them later. With medical inflation rates as high as 15% annually in India, today's costs could double in under 5 years. Hence, buying early is ideal.

Income Replacement vs Medical Expenses

In the long run, maintaining your family's lifestyle requires greater capital than paying hospital bills. For instance:

• The cost of private college education for two children, including overseas studies, could cost between ₹1-3 crore or more

• Buying a house for a family staying on rent after the sole earning member passes could cost ₹50-75 lakhs

Compared to typical medical treatment costs, health insurance plans may seem less expensive in comparison. Hence, higher life insurance coverage is key for income replacement.

Conclusion

Deciding between purchasing life insurance and health insurance can seem complicated, especially if you have budget constraints. However, both serve very different purposes and protect against distinct life events. Having adequate coverage for both income replacement and medical crises is advisable for long-term financial safety.

Frequently Asked Questions

Do I need both life and health insurance, or is one of them sufficient?

It is best to have both life and health insurance in place as early as possible to get adequate financial protection. The older you get, the more expensive premiums become. So, whether you start with life or health insurance, make sure you buy the other one as soon as possible, too.

Will my life insurance policy pay my medical bills if I fall sick?

No, a life insurance policy will only pay out the death benefit to your nominee if you pass away during the policy term. It does not offer coverage for medical expenses incurred if you get hospitalised while still alive. Hence, buying health insurance is still essential.

Can I buy both health insurance and life insurance plans at the same time?

Yes, you can and should have separate health and life insurance covers operational at the same time. Based on your budget, you can decide which one you wish to buy first, but having both simultaneously is advisable for complete protection.