Life insurance vs life assurance
Many people assume that life insurance and life assurance are the same thing, when in fact there are differences between these two types of policy.
Here we explain how life insurance and life assurance work, to help you decide which might be right for you.
What is life insurance?
Life insurance is designed to pay out a tax-free lump sum if you die during the term of the policy. Cover can either be arranged on a ‘level’ basis, where any pay out on death remains at the same level throughout the policy period, or on a ‘decreasing’ basis, where the level of cover provided reduces as time goes by. Decreasing cover is often taken out alongside a repayment mortgage, so that the amount your dependants receive on your death is the same as the amount outstanding on the mortgage.
Decreasing cover tends to be cheaper than level cover because the amount the insurer may have to pay out reduces over time.
What is life assurance?
Whereas life insurance has a fixed term, life assurance typically covers you for your entire life and so is often known as ‘whole of life’ cover.
Premiums for this type of cover tend to be more expensive than for life insurance as a pay out is guaranteed. It’s also more likely that premiums will be reviewed every few years, meaning they could increase throughout the life of the policy.
Some life assurance products are linked to investments, so part of your premium will be invested. This means the amount of any pay out received on death will depend in part on how the investment part of your policy has performed. Always seek professional advice if you’re considering this type of plan and remember that the value of investments can go down as well as up.
Life assurance vs life insurance: The benefits
Life assurance and life insurance can both provide valuable peace of mind that your loved ones will receive a lump sum in the event of your death. This can be used either to pay off the mortgage, or to cover other essential outgoings - or both. The main difference between life assurance and life insurance is that life insurance covers you for a set term, whereas life assurance covers you for your whole life.
The benefit of life insurance is that premiums will typically be lower than for life assurance, and you can pick how long you want to be covered for, and whether you want cover to remain the same or decrease over time. If you die outside the term of the policy, you won’t receive any pay out, even though you might have paid premiums for many years.
With life assurance, however, the main benefit is that you will have cover for your entire life, although if you choose an investment-linked product, the amount your dependants will receive in the event of a claim isn’t guaranteed.
Premiums for both types of cover will depend on your age, health and lifestyle. For example, a young non-smoker in good health will pay less for life assurance or life insurance than someone who is older, smokes, and has pre-existing medical conditions.
Which do I choose?
The decision whether to go for life insurance or life assurance will depend on your individual circumstances and what you are looking for from this type of cover.
For example, if you want to be certain that your mortgage will be covered in the event of your death, but aren’t worried about having life cover after this, life insurance may be the right option for you.
If, however, you want peace of mind that your loved ones will receive a lump sum whenever you die, life assurance may better suit your needs. Ultimately, the choice will be down to you, but if you need help, one of our expert protection advisers can talk you through all the available options and compare the cost of cover from several different providers.