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.
Life insurance covers you for a set term that you decide at the onset of the policy — usually between 10 and 25 years. Most people take out life insurance to ensure their financial commitments are met in the case of their death. Most mortgage agreements will require you to have some form of life insurance cover so your mortgage will be taken care of in the case of your death.
Some people take out insurance to cover them while their children are young, choosing a policy end date to coincide when their family is likely to be financially independent.
There are two types of term life insurance:
Level term - where the amount you will receive is fixed and stays the same over the entire term
Decreasing term - where the amount you will receive decreases over the term - usually used to match the outstanding balance on your repayment mortgage.
Decreasing term insurance is cheaper than level term cover and you can have both decreasing and level term insurance at the same time, for the same terms or for different terms.
The key thing to remember about life insurance is you’re not guaranteed to get a payout, as you’re not guaranteed to pass away within the term. Much like car and home insurance where you’re not guaranteed to crash your car or be burgled, the insurance is there for peace of mind if you do.
If you outlive the policy, you won’t get a payout or a refund of any premiums you’ve paid, but you can apply for another policy.
The meaning of life assurance is that it is not a fixed-term product — it’s intended to cover you until you pass away, whether that’s weeks or decades after you’ve bought the policy.
Life assurance is often sold as ‘whole of life’ or permanent insurance, and comes in many forms. It tends to be more expensive than standard life insurance as it covers you for a longer term and you’re guaranteed a payout at the end of the policy.
Some insurers will require you to make regular payments until the end of your life, but with others you can stop paying your premiums at an advanced age (e.g. 85) and still get a payout upon your death.
A life assurance policy is also offered by some providers as an investment product, also known as investment-linked life assurance or an endowment policy.
The premium you pay each month will be split — some will go towards your final payout (as with a normal life insurance policy), while some will be invested by the life assurance provider.
You will usually be guaranteed a minimum payout in the event of your death, but the full amount of the lump sum received will depend on the performance of the investment part of your policy. Some investment-linked policies turn out to be very valuable, but there is also the risk that your family could receive less than you’ve paid in over your lifetime.
You may also be able to end your policy early to ‘cash in’ on the investment value, but a large penalty fee is usually applicable. Some policies have a maturing date, at which time your invested element will pay out.
It’s important to remember that the value of any investments can go up or down and your final payout may be affected by this. As investment-linked life assurance is a specialist product, it’s recommended you speak to a financial advisor if you’d like to purchase one.
An easy way to remember the difference is life insurance covers you for if you die within the term of the policy, but life assurance is there for when you eventually pass away.
As with all types of life and health insurance, your premium will depend partly on your medical history and current health status.