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Most people on the street think that life insurance and life assurance refer to the same thing. This is a wrong assumption. Many financial commentators get this wrong as well so not need to feel ashamed about this. The two perform different financial roles and are on opposite sides with regard to cost. Having this knowledge helps to look for the right product.

Life Insurance

This provides you with an insurance cover for a specific period of time. This period of time is refered to the policy’s “term”. In the event of death while the policy in is force, the insurance provider pays out a tax-free amount. If you are alive at the end of the term, the policy is finished and has no residual value. The policy will have a value if there is a claim, similar to car insurance.

Life Assurance

This is different to life insurance. It is a hybrid mix of investment and insurance. Life assurance pays out a sum equal to the higher of either a guaranteed minimum underwritten by the policy’s insurance provisions or its investment valuation. The value of the investment element is then a reliant on the Insurance Company’s investment performance and length of time you have been paying the premiums.

Every year the insurance provider adds an annual bonus to the value that is guaranteed for the life of the life assurance policy. Also, there are normally an extra “terminal bonus” at the end. As the years pass, there is an increase in value of your life assurance policy as investment bonuses build up. The insurance provider investment performance then determines the value of these bonuses. Once investment value has been assigned to the policy, you can cash out with the insurance provider. Selling your life assurance policy to a specialist investment broker will usually get you a better price as compared to cashing it out with the insurance company.

If you meet you demise during the term of the life assurance policy, the provider will pay the higher of either the guaranteed minimum sum or the accumulated value of the annual investment bonuses. If you are still alive at the end of the term of your life assurance policy you usually get a bigger payment. The reason for this is that additional term bonuses are awarded with most insurance companies.
“Whole of Life” is also another specialised form of life assurance. These are in force for as long as you are alive, meaning that there is not preset term.

The different between life insurance and life assurance is also seen when it comes to the internet. You can easy buy life insurance online but with life assurance, the financial services authority view life assurance as an investment product fundamentally. Because of this it is considered that the best way to sell life assurance is by a financial advisor. The advise is based on the understanding of your personal details. For this reason life assurance is not readily available online. Regardless of this fact, it is easy to find suitable financial advisors online.

The use of life insurance and life assurance policies

Life insurance is usually the centre of the family’s financial protection. It ensures that debts such as mortgages are paid in full in the event of death. Both life insurance and life assurance can be used in the event of death of the policy when it comes to providing a lump sum for general use. The difference between the two would be that with life insurance the amount of the payout is preset as compared to life assurance where depends on the guaranteed minimum and the insurance providers investment performance. It is important to bear in mind that the life insurance is worthless at the end of the term whereas the payout is a sizable amount with life assurance. Viewed in the context, life assurance is more worthwhile but the majority of people choose life insurance.

Why do you think this is so? It comes down to the cost. Life assurance is more expensive that life insurance. In recent years, investment returns on life assurance have fallen significantly and there have been penalties for cashing in policies early have been placed by insurance companies. This has hugely affected the value of resale of the life assurance policies

Lastly, a product that will give you a lump sum on your death, with a minimum payout guaranteed, you probably should go for Whole of Life insurance. It is a form of lifetime investment with the benefit of a guaranteed minimum. They’re particularly useful for Inheritance Tax Planning as well with Whole Life insurance.
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