Life insurance vs. health insurance

Roman Danaev

19 December 2024

Are you looking into insurance to guard yourself and your family? It’s natural to wonder how to get the most value from your budget. Life insurance and health insurance are top choices, each with distinct benefits, so understanding what each one offers will make all the difference. Here’s a straightforward look at how they work and what sets them apart to help you make the best choice for your needs.

Key differences between life and health insurance

Health insurance and life insurance are both important, but they are very different products. Here’s a quick guide to the key differences:

What is life insurance, and how does it work?

Life insurance acts as a financial safety net for your loved ones if you pass away. It’s a contract between you and the insurance company, where you pay regular premiums to secure coverage.

If you pass away unexpectedly, the policy gives a single payment to the people you choose as beneficiaries. This money is meant to help them cope with future income loss and cover any outstanding costs, such as funeral expenses, medical bills, or debts. In short, a life insurance policy gives your family the financial support they need during a challenging time.

Key benefits

Here’s how a life insurance plan can benefit you:

• Life insurance pays a benefit – The policy will give your family a one-time payment and offer financial protection to help them with their expenses.
• Peace of mind – You know your family won’t face financial trouble during hard times.
• Stable premiums – Your premium payments remain consistent, which makes budgeting easier unless you decide to make changes to your plan.
• Flexible coverage options – You can choose the amount of coverage you want and how long you need it.

What does life insurance cover?

Life insurance provides financial assistance for any expenses that arise after the policyholder passes away. It typically provides a cash payout to beneficiaries to be used to cover funeral costs, settle debts (like mortgages or personal loans), and support ongoing living expenses for loved ones.

Certain life insurance plans also allow for add-ons, known as riders, to cover critical illness or disability during the policyholder’s lifetime.

Different types of life insurance

You generally have three main choices when it comes to life insurance:

Term assurance

The most commonly chosen option is term life insurance. It allows you to decide on the amount of coverage you want and the duration for which you need it. Your beneficiaries will get a financial sum in the event of your death while the term is active. However, if you outlive the term, the policy will not provide a payout, and you won’t get any of your premiums back.

Term insurance comes in various types, such as level-term, decreasing-term, and increasing-term. Sometimes, combining these options will give your loved ones better protection.

Family income benefit

Family income benefit insurance is a specific type of decreasing-term policy. If the policyholder dies while the coverage is active, this insurance provides a regular monthly or annual income to their beneficiaries. However, if the policyholder passes away after the coverage period ends, there won’t be a payout.

Whole-of-life insurance

Whole-of-life insurance offers lifelong coverage; you might also come across it as permanent life insurance and universal life insurance. This means your beneficiaries will receive a payout whenever you pass away. While whole-of-life policies usually have higher premiums than term assurance, they provide lasting protection that helps secure your family’s financial future at any time.

What is health insurance, and how does it work?

Health insurance is an agreement between you and a provider that offers essential financial support during medical emergencies. It comes into play when you have health issues, need treatment, or go to the hospital. In exchange for this coverage, you pay a set premium.

Depending on your specific policy, health insurance can reimburse you for out-of-pocket medical expenses or allow the insurer to cover medical expenses directly. Many plans also include coverage for prescription medications to help you manage your healthcare expenses more effectively.

Key benefits

These health insurance benefits make managing your healthcare simpler and more convenient:

• Quick access to treatment — Having a health insurance plan reduces wait times and allows you to get the care you need without delays.
• Private hospitals and quiet recovery — You gain access to a private hospital and a private room. As a result, you get a more peaceful and comfortable environment for recovery without worrying about hospital bills.
• More choice in your healthcare – Private health cover lets you decide where you receive treatment, how your care is managed, and even who treats you, giving you more control.
• 24/7 access to a GP – Many providers include round-the-clock access to a doctor by phone or online, so you can receive support and advice at any time.

What does private health insurance cover?

Standard policies usually include inpatient and day-patient care, which means that if you need to stay in hospital, your insurance will cover accommodation, medication, and any surgery costs. Many plans also include cancer treatment. For basic outpatient care, such as essential scans or minor procedures, some policies offer limited coverage.

Many plans also offer mental health support, including counselling sessions and virtual GP services for 24/7 doctor access via phone or video. For added flexibility, you can customise your coverage with extras like dental, optical, and various therapies.

Different types of health insurance

Health insurance is divided into three main types:

Individual health insurance

This policy is designed for one person and provides essential coverage for various health issues, accidents, hospitalisation, and medical emergencies. It can include additional benefits, such as maternity coverage, outpatient expenses, and critical illness protection.

Family health insurance

Family health insurance plans are structured to protect all members of your household under one comprehensive policy. With a single premium, this coverage protects everyone in the family from illnesses, accidents, and hospital stays for their entire lives. It’s a practical choice for families wanting to streamline their healthcare.

Business health insurance

Business health insurance is designed specifically for small businesses to meet the healthcare needs of their employees. This plan provides private medical coverage for all staff. It helps control the costs of private healthcare by covering everything from diagnosis to treatment, and in fact, shows the employer cares about the health and wellbeing of their team.

Comparing life and health insurance

We’ve taken a sneak peek into the differences between life insurance vs. health insurance, but now it’s time to dive deeper.

Purpose and focus of each policy

Health insurance focuses on managing medical costs and covers expenses for hospital visits, surgeries, and preventative care. The primary role is to protect your health by making healthcare more affordable and accessible.

Life insurance is meant to offer financial protection to your family after you pass away. The main goal is to make sure your beneficiaries get a one-time payment that helps cover living expenses, debts, and future financial needs.

Coverage scope and exclusions

Health insurance pays for many medical services, such as doctor appointments, hospital stays, and prescription drugs. However, it may exclude certain pre-existing conditions or specific medical treatments not covered by the policy.

In contrast, life insurance typically covers death and terminal illnesses and may include additional options for critical illness. Exclusions apply as well, such as suicide within a certain period or participation in high-risk activities.

Premiums and costs

Health insurance premiums tend to increase annually based on age and health status, which reflects the rising costs of healthcare. In general, the pricing for health insurance is complex due to various plan options and coverage levels.

Life insurance has fixed premiums for the duration of the policy (like term life) or slightly variable rates for whole life insurance policies. These costs are influenced by age, health, and lifestyle.

Payout structures

Health insurance usually doesn’t offer a one-time payment. Instead, it pays for medical expenses as they occur to cover costs directly with healthcare providers. On the other hand, life insurance gives a one-time payment to your beneficiaries when you pass away or get diagnosed with a terminal illness for immediate financial support.

Tax considerations

In some cases, you might be able to deduct health insurance premiums from your taxes, and some medical expenses you pay out of your own pocket could provide tax benefits. Life insurance usually offers tax-free death benefits to beneficiaries. However, premiums paid for life insurance are generally not tax-deductible.

Critical illness cover

Health insurance may include critical illness coverage, either as part of the policy or as a separate product, so you can count on a payout when a specified illness is diagnosed. Some life insurance policies also offer riders if the policyholder is diagnosed with a serious condition.

Can you have both?

Yes, you can absolutely have both life insurance and health insurance. Many insurers provide these policies separately so you can meet your current health needs while also protecting your family’s financial future if you pass away.

However, you should keep in mind that having both types of insurance will increase your overall premiums. You’ll need to consider your budget and financial priorities to decide if this extra coverage is worthwhile. Having both policies can give you peace of mind, but make sure this fits within your financial situation.

When do you need life insurance, and when health insurance?

Here are a few specific scenarios that illustrate when each type of insurance is most appropriate.

Life insurance:

• If you are the primary earner in your family, life insurance can be essential. It ensures that your family can cover ongoing expenses, such as loan payments, tuition fees, and regular living expenses, in the event of your passing.
• If you have children or other dependents who depend on your earnings, they’ll have more financial security and maintain their lifestyle.
• If you carry substantial debts, such as a mortgage or personal loans, life insurance can prevent your family from facing financial hardship.
• Life insurance can help you take care of expenses related to funerals and burials. This will ease the financial burden on your family.

Health insurance:

• If you need medical treatment, health insurance is important for covering those costs and making sure you get the care you need without worrying about the waiting times.
• If your family has a history of health problems, having health insurance can give you reassurance and help cover any medical expenses that may arise.
• Health insurance might also pay for preventive care, including routine checkups, and help you stay healthy and detect potential problems early on.

What do life and health insurance policies have in common?

One key similarity is that many insurers offer member reward schemes, which provide perks and discounts for eligible policies. These rewards encourage healthier lifestyles and foster a sense of community among policyholders. Both life and health insurance customers often benefit from these rewards, though some insurers tailor their programmes to allow you to earn perks based on your health activities. For example, you might receive discounts for attending regular checkups or reaching fitness goals.

Also, many insurers provide resources to help you understand your policies and make informed health choices, such as workshops or online tools. These shared features provide financial benefits and encourage a proactive approach to health.

Do you need health insurance?

In the UK, residents benefit from free healthcare through the NHS, which offers a wide range of medical services. If you’re comfortable using the NHS for your healthcare needs, you may not feel the need for private health insurance. However, if you prefer quicker access to treatment and more control over your healthcare choices, a health insurance policy is worth considering.

Private medical insurance gives you access to private healthcar services, so you can receive treatment without the long waiting times associated with the NHS. You can choose to be treated in private hospitals or clinics for a more comfortable experience. Also, health insurance gives you the freedom to select your specialists and schedule appointments that fit your lifestyle.

Do you need life insurance?

You may need life insurance if you have financial dependents, such as children or a partner who relies on your income, or if you have a mortgage. It can offer your family the monetary support they need to navigate expenses and maintain their quality of life after you’re gone.

That said, if you’re single, your partner earns enough to support the family, or you qualify for state benefits, life insurance may not be necessary. Also, check if your employer provides life insurance coverage, and if so, you might not need an additional policy.

Final words

Life can throw curveballs when you least expect them. If you’re planning for the future and want peace of mind for yourself and your loved ones, health and life insurance are two solid steps. Health insurance pays for your medical bills or treatment expenses, and life insurance ensures your family is financially supported if the unexpected happens.

Both types of insurance serve an important purpose, and the choice is yours based on what feels right for your situation. Do some research, compare a few policies, and find the coverage that is just right.