Many subjects in the world of finance appear relatively straightforward, although they are often misunderstood. One is the difference between life insurance and life assurance, two terms often interchanged in the wrong context. We will now look further into these types of life cover and the various options available.
How do life insurance and life assurance differ?
While the terms life insurance and life assurance can sometimes cause confusion, the difference is relatively straightforward:-
Life assurance normally covers the whole of life; life insurance covers a specific term.
These insurance policies can be used for a variety of reasons such as:-
- Repayment of outstanding mortgage on your death
- Inheritance tax planning
- Providing financial support for loved ones on your passing
- Repayment of loans and other outstanding debts
- Covering the cost of your funeral
- Helping to minimise disruption to your business
While many people see life insurance/assurance as a simple type of cover, they are often integral to long-term financial planning.
Different types of life cover
It will be no surprise to learn that different life insurance and life assurance policies can assist with specific financial arrangements.
Life insurance policies
As life insurance covers a specific period, it is often referred to as term life insurance. The UK has a very mature insurance sector. Consequently, there is an array of flexible arrangements for you to consider. The main types of term life insurance cover include:
- Decreasing term life cover
As the term suggests, with this arrangement, the payout on death will decrease over time, often in tandem with an outstanding debt such as a mortgage. The policy would be structured to cover your outstanding mortgage capital on day one, decreasing in line with the balance, to zero at the end of your mortgage and term life cover. While commonly used to guarantee mortgage payments, it can be helpful for any debt.
- Level term life cover
This is the most common type of term life insurance cover, providing an unchanged payment whether you die at the start of the term or the end. When the payout remains constant throughout the policy, the relative spending power will be eroded by the effect of inflation. Even though inflation tends to average low single digits in the long term, the recent increase to more than 10% highlights the potential dangers.
- Increasing term life cover
When looking at increasing term life cover, it is essential to recognise the inflation-adjusted payout going forward and the impact on premiums. This type of life cover is perfect for those looking to retain spending power for their partner or broader family on their death. While the payout will increase in line with inflation, premiums will be reviewed regularly and may also rise. At the outset, there may be the option to increase premiums at a fixed rate per annum or linked to some form of inflation measure.
Life assurance policies
As we mentioned above, life assurance cover has no time restrictions, with cover extended to your death – as long as the premiums are paid. Premiums for life assurance policies tend to be higher than their life insurance counterparts because they are typically in place for longer, and payment will be made at some point.
The variation in life assurance policies is not as broad as life insurance, but there are two different types of cover:
- Fixed cover
This type of life assurance policy has fixed cover and constant premiums for the duration of the policy. Consequently, you can plan knowing there will be no change in the monthly premiums.
- Investment element
The other variation of life assurance offers partial or complete exposure to an investment element. With this type of policy, part or all of your premiums will be paid into an investment fund. Depending on the performance of the fund, the payment on death may be higher than expected. Conversely, if the investment fund falls over time, you may have to pay higher premiums to make up the difference between the original target payout.
Taking professional financial advice
Life insurance and life assurance policies offer a degree of protection for all parties. As you can see above, many options and enhanced degrees of flexibility exist. Consequently, it is crucial to take professional financial advice to ensure you are doing the right thing for your situation.
Summary
Life cover (insurance or assurance) is critical to any long-term financial planning. It can help to finance outstanding debts or provide financial support for your partner and family. Traditionally held in trust, the payout tends not to form part of the deceased estate, therefore, minimising potential inheritance tax liabilities. While some people see insurance policies as a cost, others see them as an investment.