Life assurance and life insurance are terms that are often confused. Many people think they are one and the same thing, but they actually have a number of differences. Are you thinking about taking out one of these policies? It’s important to understand the differences to decide which one is right for you.
What is life assurance?
Life assurance is a type of insurance that runs indefinitely. It only ends at the time of the policy holder's death or when they stop paying their monthly premiums. As long as the policy holder keeps making the monthly payments, it will pay out at whatever age you pass away. For this reason, it is sometimes referred to as whole-of-life insurance or entire life insurance.
The payments for this type of insurance tend to be higher because the provider has to make a pay-out at some point.
This type of policy is often used to contribute towards funeral expenses, pay outstanding debts such as a mortgage, or to leave as a gift to family.
How does life assurance work?
You might decide to take out a life assurance policy, for example, if you’re planning your own funeral in advance. You decide how much you want the eventual lump sum to be and your monthly premiums are calculated accordingly.
Other things can affect the cost of your monthly premiums, such as:
- General health
- Lifestyle choices
- Medical history
You pay the monthly premiums until you pass away and your family receives the agreed lump sum. Your family has to make a claim, so you must put the details and beneficiaries of your life assurance policies in your will.
What is life insurance?
Life insurance is a policy that pays out a tax-free sum to someone of your choosing should you die during the term of the policy. You pay monthly premiums throughout the term of the policy so that your family receives the agreed amount if you pass away. If you live longer than the term, the policy ends and no pay out is made.
You can take out life insurance policies at any time but many people choose to take out life insurance that ends when they stop working or to run alongside a big financial commitment such as a mortgage.
There are different types such as:
- Term life (level cover) insurance
- Decreasing-term life insurance, and
- Increasing-term life insurance
Another type you might hear about is over 50 life insurance. You might be wondering “Is over 50 life insurance worth it?” The simple answer is yes it is because you can set the finer details of the plan and as long as you’ve had the policy for more than two years, you can expect it to pay out.
Life assurance and life insurance compared
Life Insurance:
- Covers you for an agreed term
- If you die after the term of your policy, your family receive nothing
- Policy runs for a specific period, usually a set number of years which can vary
- You can choose between level, increasing, or decreasing cover
- Monthly premiums tend to be lower than life assurance premiums
- No investment element
Life Assurance:
- Covers you for the rest of your life
- Your family is guaranteed a pay out when you pass away
- There is no term with life assurance
- You have the option to increase the pay out during the policy but you can’t decrease it
- The monthly premium tends to be higher than a standard life insurance premium
- An investment element can be included if sold through an adviser
What type of policy should I choose?
Everyone’s circumstances are different so which type of policy is right for you depends on what type of cover you’re looking for. For many people, life insurance provides adequate cover for their needs at an affordable price. This is because most key life events last a certain number of years.
For example, raising a child typically takes 18 years and many mortgages last around 25 years. Many people choose life assurance because they can set the term to last the length of their most expensive life events. Once those financial commitments are finished, their family might not require a lump sum payment should they pass away.
If, on the other hand, your family will require financial support if you were to pass away many years in the future, then life assurance might be a better option. You’ll have peace of mind that no matter when you die, your family will be looked after. It is also why some people use life assurance for Inheritance Tax Planning.
There is an alternative that can also give you peace of mind. Should you, for example, choose life insurance or funeral plans?
Alternative choice
An increasing number of people are choosing funeral plans as a way of offsetting their funeral expenses. There is a wide range of different products that can cover some or all of your funeral costs, one of which is a funeral plan.
With a funeral plan, you pay a fixed sum in advance for the key elements of your funeral service and make an agreement with a funeral plan provider, such as Pure Cremation, to carry out your funeral when the time comes. Most providers offer a range of options and two of the most common are Over 50s and Over 80s funeral plans.
Find out more about Pure Cremation’s funeral plans right here.