Difference Between Life Insurance and Fire Insurance

Introduction

The insurance company and a policyholder go under a contract which is known as Insurance. Under this contract, the policyholder pays premiums- a specific amount decided at the time of contract, at predetermined intervals for a certain period. In the event of a mishap, the insurance provider will reimburse the policyholder a predetermined quantity of money.

A car insurance policy, for example, may cover partial or total spending for damages incurred in the case of a car accident, providing the occurrence satisfies the parameters specified in the contract.

Insurance policies benefit the policyholder in many ways. Since the premium amount payable is deductible from taxes, holding a policy helps one save on taxes. It not only protects us from many uncertainties but also allows us to manage our finances and invest more practically.

In India, there are multiple types of insurance policies available that an individual can choose from, such as Life Insurance, Property Insurance, Marine Insurance, Fire Insurance, Liability Insurance, and so on. In this article, we will have a look at how life insurance distinguishes it from Fire Insurance. 

Life Insurance vs. Fire Insurance

Fire insurance covers damage caused by uncertain events such as accidental fire, lightning, explosion or implosion, and aircraft damage. In contrast, Life insurance compensates you for the death caused by illness, accident, or any natural cause.

The critical difference between Life insurance and Fire insurance is that losses due to the policy-holding person's death are covered under Life insurance. And, losses caused to the policyholder’s property due to the fire event are covered by Fire Insurance. 

Distinguish Between Life Insurance and Fire Insurance in Tabular Form

Parameters	Life Insurance	Fire Insurance
Definition	Life insurance is a contract in which the insurer agrees to pay a specified quantity of money to the policyholder in the case of death or at the conclusion of the contract period.	Fire insurance is a contract in which the insurer agrees to pay the policyholder for property damages caused by a fire.
Coverage	Life insurance covers the death of the policyholder due to reasons such as long-term illness, accident, etc.	Fire insurance covers losses of property of the policyholder caused by an accidental fire: lightning, etc., and other man-made perils.
Indemnity	Since nobody's life can be compensated, the Principle of indemnity is not applicable for Life Insurance.	Partial or complete compensation is paid to the policyholder in the event of fire damage, according to the terms of the policy. Hence, the Principle of Indemnity applies here.
Time	The duration of this contract ranges from 5 years to more than 25 years or till the death of the policyholder.	The duration of this contract is comparatively shorter. It is for one year or lesser.
Interest	Insurable Interest must be specified at the time of taking the policy.	Insurable Interest should be specified at the time of taking the policy also at the time of loss.
Medical checkup	A medical check-up by the insurance company is necessary to claim Life Insurance for death or illness.	A medical checkup by the insurance company is not needed to claim the compensation.
Suitable for	Any individual	Any individual, especially property such as house, godowns, factory owners.

What is a Life Insurance?

To put it in simpler words, life insurance is a contract between the insurance company and a policyholder, in which the policyholder is expected to pay a certain amount at certain, predetermined intervals of time. As a return, the insurer pays a sum of the amount upon the death of the policyholder or at the end of the contract period, to his family or to the beneficiary person.

As an individual’s life is very uncertain, a life insurance policy ensures partial or complete coverage of financial risks. It can also be seen as a better mode of investment. Few life insurance policies also provide coverage for long-term diseases or events of accidents, etc. 

The insurable interest amount is fixed in life insurance since life cannot be measured in terms of compensation. But it may help their families to help with their financial obstacles, in case of the death of their sole family earner.

Types of Life Insurance

There are types of life insurance policies to be adapted based on an individual’s needs. Broadly, life insurance can be divided into the following-

1. Term life insurance

2. Permanent life insurance

Term Life Insurance

As the name suggests, this is suitable for people who are looking for short-term and low-cost investments. The duration of these policies ranges from one year to more than 30 years. An annual policy is the best example of term life insurance. The policyholder can renew the policy at the end of the contract period. However, the premium amount also increases with every renewal.

The face value is the amount that the beneficiaries would receive if the policyholder died or the insurance term expired. If the individual dies before the contract's expiration date, the beneficiaries will get the face value.

Permanent life insurance

This is a type of life insurance, in which an individual pays the premium till the end of his life. His/ her beneficiaries get the financial benefit upon his/her death. This insurance is mostly taken by the family’s sole wage earner to help the family financially, even after his death. 

This can again be classified into three subcategories:

1. Whole life insurance

2. Variable life insurance

3. Universal life insurance

Whole Life Insurance

In this type, the policyholders pay the premium amount as long as he lives and upon his death, his beneficiaries get the face value that is the benefit of the policy.

In case, the policyholder wants to surrender the policy for any reason such as terminal illness, emergencies, and so on, he may withdraw the policy and can get the cash value. Cash value is the interest amount accumulated on the premiums an individual has been paying at the time of surrender.

Variable Life Insurance

In this, the person pays premiums till his death and his beneficiaries would get the benefit after his death. However, he can choose where he wants to invest his cash value which is the premium money he is paying to the insurance company. He can invest in multiple ways such as mutual funds, bonds, shares, and so on. The interest on this can be very high due to market conditions but it’s also a bit risky. The Premium amount of this type of insurance is fixed.

Losses incurred in the market may result in a decrease in the face value of the insurance. Few insurance companies guarantee the policyholder that your death benefit will not fall below a certain level. This secures the policyholder in many ways. 

Universal life insurance

Universal life insurance expects the policyholder to pay the premium until his death like any other permanent life insurance. Additionally, it lets the policyholder make changes in the frequency of premium payments as well as the premium amount. The individual gets the liberty to structure his policy which may result in covering the entire amount of premium due to profits.

Variable Universal Life Insurance is another type of Life insurance that is the combination of Universal and Variable life insurance.

Benefits of a Life Insurance Policy

Tax Deduction

Under the Income Tax Act- ITA section 80C, life insurance premium amounts are excluded from the gross income to be eligible for a tax deduction. Face benefits of the Life Insurance Policy are also excluded from the tax deductions under 10(10) D.

Financial backup after retirement

Term life insurance allows the policyholder to acquire a good amount of returns at the end of the contract period. A well-planned policy ending at retirement time will help the individual to come over any financial hiccups.

Financial security for the family 

In case of the death of the family’s only breadwinner, the family is most likely to suffer financial issues. Life insurance gives a death benefit to the beneficiary family that cannot compensate for the loss of life but helps with the financial support.

Health risk coverage

Many Life insurance policies give coverage for chronic and terminal illnesses, accidents, long-term diseases. the expenditure for the same could not be affordable by the individual. Here's when Life insurance Policy comes to the rescue.

Policy loan

In case of financial emergencies, a policyholder can take a policy loan depending on the percentage of the cash value or a particular amount based on policy rules and provisions.

Principles of the Life Insurance Policy

Utmost good faith

It is a contract between the policyholder and the insurer hence, both are expected to disclose every possible detail required by the terms. hiding any kind of information will lead to the claim being rejected. For example, an individual did not disclose his smoking habits at the time of taking the policy and if dies due to lung cancer, then the insurance company can reject the claim.

Causa Proxima

This principle indicates the prominent cause of the loss. In a life insurance policy, the insurer is supposed to pay the policy amount to the insured regardless of the cause of the death. this principle comes into the picture in the event of suicide where the claim is most likely to be rejected.
In cases like death in the war, only the premium amount or the surrender value, whichever is higher, is paid to the insured. on the contrary, death due to accidents pays a handsome amount of returns to the insured. 

Insurable interest

The policyholder and the insured person (beneficiary) should have some personal relationship between them. the insured must be personally or economically invested in the policyholder. otherwise, it may lead to unethical activities like killing the policyholder or having them killed for financial benefits.

What is Fire Insurance?

Fire Insurance is a type of property insurance in which coverage against losses caused by fire, lightning, and the removal of property from premises endangered by fire is provided.

rates of fire insurance are dependent on factors like the location of the property and the type of its construction, degree of exposure to fire, type of work conducted in the property, etc. 

Losses incurred due to Fire caused by theft, war, invasion is non-insurable. the insurance company holds a right to cancel the contract in case any suspicious activity of the insured is suspected, such as intentionally causing the fire, vacating the property beyond the specified period, any activity increasing the loss, etc. 

Types of fire insurance

1. Valued policy

2. Specific policy

3. Floating policy

4. Consequential loss policy

5. Comprehensive policy

Valued Policy

The worth of a subject matter is determined under a Valued Policy, after which the insurer pays if it is destroyed or damaged. This policy isn't based on the indemnity principle. The agreed-upon compensation value might be more or lower than the market price.

Specific Policy

A predefined amount of risk is covered in this policy. In the event of a loss under this coverage, the insurer covers the whole loss. It does not exceed the policy's maximum limit. As a result, the property's worth isn't taken into account.

Floating Policy

A floating insurance is one that covers losses caused by fire to property owned by the same individual but situated in several locations for the same sum and one payment. The 'average clause' applies to this policy at all times.

Consequential Loss Policy

A policy that protects a business from losing earnings due to a business disruption caused by an insured risk and claim accepted under the material damage policy. A policy that protects a business from losing earnings due to a business disruption caused by an insured risk and claim accepted under the material damage policy.

Comprehensive Policy

The phrase "comprehensive" refers to something complete hence it is also called “All in One Policy” The insured can be fully protected against fire, explosion, lightning, burglary, rioting, and other perils by choosing comprehensive insurance. Comprehensive insurance is highly recommended because a single policy covers many hazards.

Benefits of Fire Insurance

Covers huge losses or damages

When a fire breaks out, it produces flames and smoke, both of which can cause damage to your business and its belongings. Even the water used to put out fires has the potential to destroy the office structure, as well as the stocks and other items held within. A fire insurance coverage will assist in paying losses or damage, ensuring that your firm remains operational.

Shares financial burden

If you do not have fire insurance coverage, you will be responsible for all losses and damages. There would be no one who could help you. A fire might also result in the entire shutdown of your firm in rare cases. It might cause a financial problem, making it difficult to reconstruct the house and its contents.

Replace damaged goods

A fire insurance policy not only covers the loss or damage to the structure but also assists in the replacement of any items that have caught fire. The insurance also covers the costs of maintaining the machinery and equipment that were destroyed in the fire.

Sense of security

It provides you inner peace and joy to know that you have fire insurance coverage in case of unforeseen hazards like fire. Even if a fire occurs and you incur damages, you are content since you have a fire insurance policy that would compensate for your losses.

Main Differences Between Life Insurance and Fire Insurance in Points

1. Life insurance is a contract in which the insurer agrees to pay a specified quantity of money to the policyholder in the case of death & Fire insurance is a contract in which the insurer agrees to pay the policyholder for property damages caused by a fire.

2. Life Insurance can be taken by an individual for himself or his family members & Fire Insurance can be taken by an individual for his property or for his business liabilities.

3. In Life Insurance the life of the individual insured can be a subject matter & in Fire Insurance the assets or the property of the insured is the subject matter.

4. Insurable interest for Life Insurance must exist at the time of contract & for Fire Insurance the insurable interest must exist both at the time of contract and also at the time of loss.

5. A medical check-up by the insurance company is necessary to claim Life Insurance for death or illness & for Fire Insurance, a medical checkup by the insurance company is not needed to claim the compensation.

6. Compensation of Life Insurance can be made either on the death of the insured or at maturity whichever is early & for Fire Insurance the compensation is only paid if there is a loss due to fire and that too only during the term of the policy.

7. The tenure of the Life Insurance can be issued for any number of years, even until the death of the insured & for Fire Insurance the tenure of the term is for a short period like a year.

8. A Life Insurance policy can be surrendered before the expiry of the term & a Fire Insurance policy cannot be surrendered.

Conclusion

Thus, life insurance comprises both a protection and an investment component that offers financial support to the insured person's family after his or her death or at the time of old age. Fire insurance, on the other hand, is a type of non-life insurance. A fire insurance policy protects property or assets against loss due to fire, explosion, or other causes.