Many people mistakenly consider Life Insurance and Life Assurance to be the same thing. This article explains the differences.
What is Life insurance?
Life Insurance is the simplest form of policy available to insure a life. Life insurance policies are normally for a fixed term (usually up to 30 years) and in the event of the insured person dying in the term, the sum insured is paid out. If the life insured survives the term of the policy, the policy stops and nothing is paid out. A life insurance policy can be cancelled part way through the term but will not have any value. In many ways it is similar to an insurance policy you have for your car in that if something happens (accident or death) a payout is made by the insurance company.
What is Life Assurance?
A Life Assurance policy is different because it contains an element of investment. The policy can be for a fixed term or for the whole of the life of the person insured. Simply, part of the premium pays for the cost of insuring the life assured to the guaranteed minimum payment and part of the premium is invested. The investment element will attract investment returns or bonuses over the term of the policy and in the long term these can add up to more that the amount the life is insured for. At the end of the policy (or on the death of the life insured) the amount paid out is the higher of the guaranteed minimum sum payment or the value of the policy.
Life Assurance policies can be surrendered at any time. In most policies there are early surrender penalties imposed that mean the amount paid out is less than the value of the policy.
Difference in premiums
Life Insurance policies will have overall lower total premiums than Life Assurance policies. However to attract customers, some Life Assurance policies have lower initial premiums that will be reviewed after typically five or ten years. This review can increase the premium substantially, often by double after each review. Alternatively the Life Assurance company will offer to reduce the amount of Life Assurance
A Life Insurance policy is usually paid out free of all personal tax. Unless the policy is in trust or the “owner” is not the same as the person insured there could be a liability to inheritance taxation when the amount paid out is added to the rest of the person’s estate.
With a Life Assurance policy, the there are different rules that apply. If the policy is classed as a qualifying policy for taxation, then after ten years the same rules apply (as for Life Insurance) on death, surrender, or maturity of the policy.
If it is not a qualifying policy, then there may be Income Tax applied on any “profit” made by the policy. The rules, for policies that are not considered qualifying, are complex and specialist advice is recommended, especially if you are close to being taxed at a higher ratye than the standard basic rate of income tax.
This article is for guidance only and must not be construed as advice. The contents of this article are aimed at the UK market, although many countries will have similar policies available. If you need advice you should refer to a Financial Adviser.