Life Insurance and Life Assurance. What is the Difference?March 24, 2019
Many people think that Life Assurance and Life Insurance are the same thing, yet there is a subtle but key difference between the two concepts. Life insurance is a protection for the term of the insurance cover. If you die during the term of the policy, the insurance company will pay a tax-free sum to your beneficiaries. But, if you outlive the term of the policy, your beneficiaries will not receive any payment.
Life Assurance, on the other hand, is not based on the principle of protection for a fixed term; instead, you are covered until you die. Therefore, with Life Assurance, typically a payment is made when the policyholder dies.
Life Insurance and Life Assurance perform different financial roles and are also poles apart in cost – so it helps to source for the correct product.
Life Insurance provides you with insurance cover for a specific period of time (known as the policy term). Then, if you were to die whilst the policy is in force, the insurance company pays out a tax-free benefit to your beneficiaries. However, if you survive to the end of the term, the policy is finished and has no residual value whatsoever. It only has a value if there is a claim in that context.
Life Assurance is different from Life Insurance. It is a hybrid of investment and insurance. A Life Assurance policy pays out a sum equal to the higher of either a guaranteed minimum underwritten by the policy’s insurance provisions or its investment valuation. The value of the investment element is reliant on the Insurance Company’s investment performance and length of time you have been paying the premiums.
Each year, the insurance company adds an annual bonus to the guaranteed value of your Life Assurance policy and there is normally an extra terminal bonus at the end. Therefore, as the years go by, your Life Assurance policy increases in value as the investment bonuses accumulate. The value of these bonuses are then determined by the insurance company’s investment performance. Once investment value has been assigned to the policy, you can cash it in with the insurance company. However, most people get a far better price for their Life Assurance policy by selling it to a specialist investment broker rather than cashing it in with the insurance company.
If you were to die during a Life Assurance policy’s term, the policy pays out the higher of either the guaranteed minimum sum or the accumulated value of the annual investment bonuses. However, if you are still living when the policy terminates, you usually get a bigger payout. This is because with most insurance companies, an additional terminal bonus is awarded.
There is also a specialized form of life assurance called “Whole of Life”. These policies remain in force for as long as you live and as such, have no preset term.
There is also a practical difference for the internet user. Whereas you can buy life insurance online, the Financial Services Authority view life assurance as fundamentally an investment product. As such they believe it is best suited to being sold by a Financial Adviser with advice based on the Adviser’s full understanding of your personal details. Therefore, you will be unable to buy life assurance online. However, you can use the internet to find a suitable financial adviser with whom you can meet and discuss your requirements.
Uses of Life Insurance and Life Assurance Policies
Life Insurance is usually a focal point of the family’s financial protection. It is ideally suited to ensure that known debts such as a mortgage, are repaid in full in the event of the policyholder’s death.
When it comes to providing a lump sum for general use in the event that the policyholder were to die whilst the policy was in force, either Life Insurance or Life Assurance can be used. The differences are that with Life Insurance, the size of payout would be preset whereas with Life Assurance, it would depend on the guaranteed minimum and the insurance company’s investment performance. But remember, at the end of the policy’s term, Life Insurance is worthless, whereas Life Assurance should pay out a sizeable investment sum. In this context, Life Assurance seems far more worthwhile but in practice more people elect for Life Insurance. Why? It’s a matter of cost. Life Insurance is considerably cheaper than Life Assurance. Furthermore, in recent years, investment returns on Life Assurance policies have fallen significantly and many insurance companies have placed penalties for surrendering policies early. This has adversely affected the resale value of Life Assurance policies.
Finally, if you want a product to provide a lump sum on your death whenever that is, with a minimum payout guaranteed, you’ll probably elect for a Whole Life insurance. It’s really a form of lifetime investment with the benefit of a guaranteed minimum.