Life insurance and life assurance are often confused. The terms are used interchangeably but there are key differences between them. Both types of life cover provide your loved ones with financial protection after you pass away. However, life insurance only covers you for a certain term while life assurance covers you for the rest of your life.
What is life insurance?
With life insurance, a tax-free lump sum is paid to your loved ones if you die within the policy term. If you die when the term has ended, they won’t receive anything. There are different types of life insurance to choose from — level term, increasing term and decreasing term. Level term means the amount to be paid out is fixed. Increasing term ensures the payout increases in line with inflation. Decreasing term means the level of cover decreases as a debt, such as your mortgage, is reduced.
What is life assurance?
When you have life assurance, your loved ones receive a tax-free lump sum no matter when you die. As long as you continue paying your premiums, your policy remains active throughout your life. Also known as whole of life insurance, the premiums tend to be higher than for life insurance as the payout is guaranteed. You can increase the level of cover you have with life assurance but you cannot decrease it.
There are two types of life assurance to choose from. With balanced cover, you can agree for a fixed amount to be paid to your loved ones. You pay fixed premiums throughout your entire policy. With maximum cover, you can opt for your premiums to be invested. If you choose maximum cover, you may be able to build up a bigger pot to be paid to your loved ones if the investments perform well. If they underperform, however, your insurer may increase the premiums to cover the losses and maintain the payout amount. Alternatively, they may keep your premiums at the same level but reduce the eventual payout amount.
The advantages and disadvantages of life insurance
Advantages
- You choose how long you wish the policy to run for.
- You have peace of mind that a payout will be made to your loved ones if you die within the policy term.
- There’s more flexibility with the level of cover you can have.
- The premiums tend to be more affordable than those for life assurance.
Disadvantages
- No payout is made if you die after the policy term has ended.
- The premiums can increase significantly in the long run if you have reviewable rather than guaranteed premiums.
The advantages and disadvantages of life assurance
Advantages
- Your policy doesn’t have an expiry date. This means there’s no need to worry about extending it or taking out a new one.
- A payout to your loved ones is guaranteed no matter when you pass away.
- Your premiums can be invested when you opt for maximum cover.
Disadvantages
- You can increase your level of cover but cannot decrease it.
- The guaranteed payout makes this type of life cover more expensive.
Which type of life cover is best for you?
The type of life cover that’s best for you depends on your circumstances but the differences between how they work may make it easier to decide. You may just want life insurance cover while you have a large outstanding debt, such as your mortgage, without the need for financial protection to be in place once this has been repaid. On the other hand, you may wish to ensure that your loved ones receive a payout regardless of when you pass away. You also need to think about the affordability. As life assurance provides a guaranteed payout, the premiums are more expensive. However, you may prefer this level of financial protection despite the higher cost.
Life insurance is generally a good idea when major life events occur. For example, when you buy a property in Bexley or start a family. Having life insurance can ensure that your mortgage is repaid if you die unexpectedly so that your loved ones feel secure in the family home. If you have young children, you can ensure the policy runs until they are old enough to support themselves financially. This gives your partner or your children’s guardian financial help to cover the costs of caring for them, including extra childcare and the ongoing cost of their education.
With life assurance, you can have peace of mind that your loved ones can pay off any outstanding debts or cover their normal living expenses no matter when you pass away. They may not need any financial help at all but having life assurance leaves them a legacy so that they can enjoy financial freedom in the future.
Inheritance tax
Both life insurance and life assurance are good options if you’re concerned about your loved ones having to pay inheritance tax. You need to write the policy in trust to ensure it falls outside of your estate. This means it won’t be subject to tax and enables your loved ones to access the funds without waiting for probate to be granted.
Need help with your life cover?
When you’re ready to put life cover in place but are still not sure which type is the best fit for you, just get in touch with our mortgage and protection brokers. They will provide you with impartial advice and expert guidance. Located throughout Kent, London and Edinburgh, they are available to discuss your circumstances and protection goals to help you decide on the right type and level of life cover.
Simply give us a call on 01322 907 000 or send us an email at info@trinityfinance.co.uk. We’ll tailor-make your life insurance or life assurance policy, enabling you to put essential yet affordable financial protection in place for your loved ones.