May 6th, 2020
What’s the difference between life insurance and life assurance?
It’s a question that leaves many floundering: what’s the difference between life insurance and life assurance? It’s important to understand the nuances of each product before you make a call on which is best for you and the financial futures of your loved ones.
So let’s get to the bottom of the difference between life insurance and life assurance.
What are life insurance and life assurance used for?
Let’s be honest. It’s not easy to contemplate your own mortality. But knowing that you’ve made preparations to protect the financial futures of your nearest and dearest after you’ve gone? That can bring a lot of peace of mind.
Both life insurance and life assurance are designed to provide a lump sum for your loved ones after your death. This pay out is typically used to clear essential overheads such as unpaid debts and the cost of funeral arrangements.
Indeed many mortgage lenders will insist that you have some sort of life insurance in place before they agree to lend to you. That way if you die before the conclusion of your repayment schedule, the debt will be covered by your insurer, rather than the burden falling on your loved ones.
So, life insurance and life assurance serve a similar purpose.
Now let’s look at how these policies differ.
The terms of the policies
The term of the policy is the most important difference between life insurance and life assurance. A life insurance policy covers you for a set period of time – normally somewhere between 10 and 25 years. If you pass away outside the term of your policy, your insurer won’t pay out. In short: no policy, no pay out.
Life assurance meanwhile is what’s known as a whole-life product. Typically it will provide you with cover from the day you purchase your policy to the day you die – whether that day comes in three years or 33 years.
Life insurance: the pay out
From pet cover to gadget protection, it’s crucial to understand the nuances of how your insurer will pay out when the time comes to claim against your policy. That’s especially true when you consider that with life insurance (or life assurance), the claim will need to be made by grieving loved ones.
With life insurance your beneficiaries will receive a tax-free lump sum if you die during the term of your policy. The amount received is dependent on the type of life insurance package that you choose when you arrange your policy. That’s one reason it’s always best to go through your options with a professional before you commit to any big decisions.
If your cover is arranged on a ‘level’ basis, the amount you receive in the event of a claim will be the same whether you die in the first year of cover or the fifteenth. Other life insurance policies are arranged on a ‘decreasing’ basis, which means – you guessed it – the potential pay out decreases as you get closer to the end of your policy. You can even get life insurance that’s linked to your mortgage, whereby the pay out is based on the amount left to pay on your mortgage.
Life assurance: the pay out
With a life assurance policy, the pay out is a little more complicated than with life insurance. Essentially there are two types of policy: investment-linked and pure protection. With an ‘investment-linked’ policy, your pay out is linked to the performance of an investment, which is funded by a proportion of your monthly or annual premium. ‘Pure protection’ policies on the other hand don’t have the investment element. Instead your insurer will pay a fixed lump sum after your death, agreed when you take out your policy.
Let’s take a look at these options in more detail.
Life assurance: the investment element
With an investment-linked life assurance product, it’s useful to think of your policy as a hybrid of insurance and investment. Part of your premium will go towards a guaranteed minimum pay out at the end of your life, while the other part will be invested by your policy provider.
When you die, your beneficiaries will receive either a guaranteed minimum that’s underwritten by your policy provider’s insurance provisions, or the value of the investment element of your policy – whichever is higher. The value of this investment is, of course, determined by how long you’ve had a policy with your life assurance provider and how well they have invested your money.
Still with us? Good.
Now, with some investment-linked life assurance policies, you can take the option to ‘cash in’ on the investment value of your policy before you die. And there are certain circumstances where doing so can be prudent. For example if you have paid off your mortgage and have no outstanding debts. Unfortunately the charges for cashing in your life assurance can be high.
A ‘pure protection’ life assurance policy, on the other hand, lacks the investment element and therefore doesn’t build value over time.
What’s the difference in cost?
The cost of your cover is another crucial consideration. In general life insurance is almost always cheaper than life assurance. That’s because with life insurance there’s no guaranteed pay out. You also get to pick how long you want to be covered for, and whether you want your cover to decrease over time. That de-risks a lot of things for your insurance provider, which is reflected in lower premiums.
Life assurance is more expensive because a pay out is guaranteed, whatever happens. With some policies you will be required to make payments until the end of your life, while others allow you to stop paying a premium once you reach a certain age. Your premium will typically be reviewed every few years. As such your payments could increase over time.
Finally, both life insurance and life assurance providers will look at factors such as your age, medical history and whether or not you smoke to help determine how much you pay for your cover.
Purchasing a policy
Because life assurance contains an investment element, it’s necessary to work with a financial adviser to arrange your cover. Life insurance is far quicker and easier to purchase. You can even arrange a policy online.
What’s the best option for you?
If we had to provide a two-sentence summary on the difference between life insurance and life assurance, here’s what we’d say. Life insurance tends to be cheaper but only pays out if you die during the term of your policy. Life assurance is more expensive but provides the security of a guaranteed pay out of some kind – depending on whether you choose an investment-linked policy or a pure protection option.
The million-dollar question: which option is best for you? Well that depends on your personal, medical and financial circumstances. However as independent experts in financial planning, we can help you find the best options for your circumstances. Get in touch and allow us to explain how we can help you make confident decisions about provisions for your loved ones.