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“Life insurance”, and “life assurance” – what’s in a name? More particularly, what’s in two letters? We can all be forgiven for thinking that both life insurance and assurance are the same thing, but in fact they are two very different sides of the same coin. In this article we will look at what those differences are and which might be more suitable for you.
Life insurance pays out a lump-sum upon the death of the policyholder. This payout is usually purchased in order to meet the financial obligations that might be left by the policyholder after they’ve passed away: mortgage repayments, living-expenses for dependents and funeral costs. These insurance policies can be arranged on several different bases. You can purchase level term cover, decreased cover or increased cover depending on your situation – we will look at the further differences between these covers below. The defining feature of life insurance however is that it is “insurance”. Hence you are not necessarily guaranteed to benefit from this cover. That is because life insurance tends to be for a fixed term. Clauses in life insurance will limit your coverage period, stating that coverage will cease at a maximum age (90 for example) or after a number of years as a policyholder (50 years for example) – whichever comes sooner.
These life insurance policies can come with cash-in options. You might not necessarily be assured your total coverage payout, but it could be possible to cash-in your policy at a particular point, receiving a percentage of the payout, with the policy itself coming to an end.
Life assurance in comparison is more of a certain payout rather than life insurance where you may or may not receive a financial payout at the end of it. Life insurance is fixed term, with your policy coverage ceasing after a certain period or at a certain point. Life assurance will cover you for the entirety of your life, with no age restrictions or time limits. This insurance can also go by the name of whole-of-life cover, and is especially targeted at those in their order years and over-50’s.
The premiums for this kind of insurance product will be higher than other life policies as the insurer has to take into account the fact that they will be paying out for every customer who buys this.
Another element of these life assurance policies is that of an endowment feature: endowment life assurance policies make the insurance policy also a pseudo-investment vehicle, with the policyholder receiving annual bonuses if their investments within the policy have performed well. This is suitable for the policyholder because the overall life payout at the end of the policy tends to be less than that in life insurance.
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Life Insurance will give you access to all three of the following coverage triggers, where life assurance can only really provide level and increasing cover.
Level cover gives the policyholder a fixed payout amount that remains unchanged from the beginning of the policy to the end. So a £100k benefit at the start of the policy will go on to pay £100k at the end. Just as the coverage is set, so are your premiums which remain unchanged. An advantage of this is that you can be sure exactly what your premium outlay is going to be throughout the policy period, and can so can plan your long-term finances and budget with more confidence.
Decreasing cover means that the payout you have elected to purchase your life insurance will reduce over time and eventually end up at zero. Why would you want this? If you are purchasing your life insurance to cover the costs of any outstanding long-term debt (such as a mortgage) that reduces over time (and so also reaches zero eventually), this makes sure you aren’t paying for coverage you don’t need. These policies tend to be the cheapest of the three options mentioned here. It is not applicable to life assurance but that policy type has to pay something at the end of it.
This is available with both life insurance and life assurance, and means that one’s insurance payout is protected from the effects of inflation over time. With level cover, your payout will remain the same over the years. However, £100k today is worth a lot less than £100k ten years ago. By having a policy whose coverage payout increases in line with the Retail Price Index, you can be assured that your payout will hold its value over the years. Of course this also means that your premiums will increase also, but it’s still a good option to think about if you are concerned about market movements over time and how they affect your finances’ health.
The decision of life insurance or life assurance is very much a subjective choice, as people purchase such end-of-life cover for different reasons.
The benefit of life insurance is that your premiums will tend to be cheaper than that of life assurance – indeed you will probably find the payouts to be larger also. Clearly the flip side however is that your claim is not guaranteed. Now, if you’re looking for something that is true insurance, where perhaps you only need it to cover your mortgage for example, after which such financial protection isn’t so necessary, opting for life insurance probably makes more sense. However, if you are trying to secure a product that will cover your funeral costs and a certain amount of living expenses for your dependents after you’re gone, then life assurance sounds more suitable.
As we’ve mentioned, this is a decision that comes down to the individual, but if you need more advice, we recommend speaking to a specialist life insurance broker who should be able help further.