Difference Between Reinsurance and Double Insurance

Insurance has become an important part of our lives as it provides financial protection or coverage against uncertain losses. However, people often get confused between two important terms used in insurance- reinsurance and double insurance.

These two terms appear to be the same but significant differences lie between the two. Let’s understand how reinsurance is different from double insurance.

What is Reinsurance?

Reinsurance is an agreement between the two parties involved- the insurance company and the reinsurer company. Sometimes insurance companies pass on some of the potential risks to other insurance companies to reduce the losses that can occur. It is also called insurance for insurance companies.

Generally, insurance companies take reinsurance when the risk involved or the insurance amount is high. This practice has become common nowadays. Let’s understand how reinsurance works in actual life.

Suppose Mr. Somdeep has purchased a life insurance worth Rs 5 crore from ABC Ltd. ABC Ltd took reinsurance from XYZ Ltd for an amount of Rs 2 crore. In case of Mr. Somdeep’s demise, ABC Ltd would bear an amount of Rs 3 crore and the rest of 2 crore will be borne by XYZ Ltd. In the above scenario, XYZ Ltd is the reinsurer for Mr Somdeep’s life insurance.

What is double insurance?

When a person purchases more than one insurance policy either from the same insurer or other insurer it is called double insurance. Generally, people take more than one insurance policy to enhance total protection or coverage. In the case of life insurance policies, an individual can purchase multiple policies but the total coverage amount depends on the life value of the individual. This value is based on the total annual income and it can go up to 20 times the annual income of the policyholder.

It is usually up to the individual how many life insurance policies they purchase. However, it is essential to inform your previous insurer that you have purchased another insurance to avoid claim rejection. Let’s understand how double insurance works with an example.

Suppose Mr. Sushil who is sole bread-earner of his family purchased life insurance worth Rs 50 lakh from ABC Ltd. A few months later he realized that the insurance policy he had purchased was insufficient to secure his family after him. So he purchased another life insurance policy worth Rs 1 crore from XYZ Ltd.

In this case, having two policies is called double insurance.

Reinsurance Vs Double Insurance

Difference Between Insurance and Reinsurance

Conclusion

Now you have understood how insurance, reinsurance, and double insurance vary from each other. Insurance and double insurance are meant for individuals whereas reinsurance is meant for insurance companies. Insurance is purchased to cover unforeseen losses and double insurance helps to enhance the overall coverage whereas reinsurance helps insurance companies to reduce their total risk. To buy a suitable insurance policy you can visit PolicyX.com. It is an IRDA-approved online insurance comparison portal that understands your requirements and helps you choose the right plan.