Although life insurance and life assurance may sound the same, in reality, they’re very different.
“When shopping for insurance you may see the terms life insurance and life assurance used interchangeably, but there are some key differences you need to understand before taking out a policy.” (Source: USwitch)
Not only do they have separate definitions but which one you’ll require, depends on your personal circumstances.
Life insurance is term cover, meaning a pay out can be claimed, but only if the policyholder dies during the policy term.
In other words, life insurance is a lump sum of money paid to a designated person (the beneficiary), if you pass away during the time that you’re ‘insured’.
Many people take out life insurance over a 15 to 25-year period, to cover key expenses such as a mortgage debt or the cost of raising a family, if they’re no longer around.
However, this does mean that the pay out is not guaranteed as the policyholder could outlive the policy. After which the policy expires and there’s no cash-in value.
Unlike life insurance, life assurance covers the policyholder for their whole life. It’s sometimes referred to as whole of life cover. Here the policyholder continues to pay monthly premiums until they pass away.
For example, the policyholder could die 3 years into the policy or 33 years in – a successful claim can still be made. With life assurance, the lump sum pay-out is guaranteed or ‘assured’.
Although life assurance guarantees a pay-out, the monthly premiums are usually higher compared to life insurance.
Types of life insurance
There are two main types of life insurance to choose from:
Level term cover – Level describes a specified fixed amount – say £300,000 – and term means for a fixed period of time – say 25 years.
In this example, if you were to die at any point during the 25 years after taking out the policy, your beneficiary would receive £300,000. If you were to die 26 years after taking the policy out, there would be no pay out.
Decreasing term cover – This is often the cheaper life insurance cover as the pay out decreases every year that passes, therefore there is less risk to the insurer.
It’s normally used to cover a repayment mortgage. As the mortgage balance decreases, the pay out amount decreases in line, ensuring you can pay off the mortgage.
Two types of life assurance
There are two types of life assurance to choose from:
An over 50s plan – Believed to be the more affordable and accessible option, many people looking to provision for the future, take out an over 50s plan.
While most insurers guarantee acceptance if you’re a UK resident aged between 50-85. It’s important to note that policyholders need to have held the policy for a minimum of 12 months before loved ones are entitled to receive the pay out.
Unlike term life insurance, a medical examination is not needed and policies can be secured for just £4 a month. This makes it a very popular choice with those with existing medical conditions.
Whole of Life cover – While whole of life cover involves a longer application process and medical examination/questions, if you don’t have any medical conditions, it may be more beneficial.
Similar to the over 50s plan, a pay out is guaranteed when the policyholder dies and there’s no set policy term. However, with whole of life cover, a greater sum can be assured.
“A regular whole of life insurance plan could give you at least 40% more cover than its heavily advertised relation, the guaranteed over 50 plan.” (Source: www.over50schoices.co.uk)
Which one should I choose?
The type of policy that you choose will depend on why you’re looking to buy it. Life assurance is often viewed as an investment product as a result of the guaranteed pay out. In contrast, life insurance is usually taken out by those who want to provision for their family if they were to die.
In addition, it’s important to remember that if you’re young and have a mortgage you can cover your property debt cheaply with insurance that covers you for a set term. Whereas with life assurance (whole of life) you pay for as long as you live but guarantees to pay out. This means, that it’s probably better suited to older folk who want to cover say funeral costs or provide an inheritance.
“Life insurance is a way of providing for your family’s financial future after you have passed…11.1m households in the UK have mortgages…£4,100 is the average funeral cost…£120,000 average outstanding mortgage debt.” (Source: The Finder)
You need to consider what would work best for your unique situation. While it’s a very important decision, one day it could make all the difference to your loved ones.
“An easy way to remember the difference is, life insurance covers you IF you die within the term of the policy, but life assurance is there for WHEN you eventually pass away.” (Source: USwitch)
Whether you’re wanting to secure an insurance or assurance policy, life insurance brokers Reassured can help you save both time and money by comparing quotes from the UK’s top insurers.
And the best bit, they don’t charge a fee for their service!