What is life assurance and how does it work?
Sadly, death is one of the many certainties in life – of which needs planning. Life insurance is a great way to provide your loved ones with peace of mind, for the tough times ahead. If you’ve started searching for life insurance, you’ve likely come across the term ‘life assurance’.
While life insurance is a self-explanatory term, it can be easy to confuse it with life assurance. In actual fact, they both work differently from each other, let’s find out how.
What is life assurance?
Life assurance is another term for a whole of life policy. It works just like a standard life insurance policy – except the policy ensures you are covered for the rest of your life. The term ‘life assurance’ refers to the fact that your loved ones are assured of a pay-out no matter when you die.
Life assurance is more expensive than regular (term-based) life insurance – which only covers you for a set period (i.e 30 years).
How it works
When you die, your insurer pays out a tax-free lump sum to your family, providing them with financial support for the future. The main benefit of life assurance is that your family is guaranteed a pay-out no matter when you eventually die.
When you take out the cover you begin paying monthly premiums to your insurer. If for any reason you stop paying your premiums you will no longer be covered.
Life assurance is more expensive than regular (term-based) life insurance – which only covers you for a set period (i.e 30 years).
Life assurance vs life insurance?
Life insurance often refers to a term life insurance policy – which is the general type of cover. Just like life assurance, term life insurance pays out a cash lump sum in the event of your death.
The main difference between life insurance and life assurance is the policy length.
Life assurance lasts up until you die, whereas term life insurance has a set policy term. This means if you survive the policy term (which is a good thing!) you will no longer be protected and so will need to seek further cover.
There are 3 types of term life insurance:
- Level cover – The standard form of life insurance cover, in which the payout amount is fixed throughout the term.
- Decreasing cover – Designed to cover large payments like a repayment mortgage; as you pay off the remaining balance, the pay-out amount decreases over time. The aim is that if you die before the mortgage has been paid off, your family can use the pay-out to cover the outstanding balance.
- Increasing cover – The payout amount increases annually to protect it from inflation. That way the eventual pay-out matches with the rise in the cost of living. The downside to this is that your premiums also increase.
Depending on your provider, with life assurance, you have the option to link your policy to an investment fund. Your insurer invests the money paid for your premiums to make a return on the eventual pay-out amount.
The benefit of this is that if the investment performs well you may receive bonuses towards your policy. However, if the investment underperforms your premiums may be increased to cover the loss. With standard life insurance, there are no investment elements.
Why do we need life assurance?
Life assurance is a great way to provide financial protection, ensuring a brighter future for the people we love. The pay-out from life assurance can help your family with payments such as:
- Everyday living costs
- Household bills
- Rent or mortgage payments
- Outstanding loans or debts
- Childcare support
- Funeral costs
- Inheritance funding
Naturally, everyone’s circumstances are different, that’s why you need to assess your family’s future needs before taking out cover.
For example, if you intend to take out life cover for mortgage purposes, you’d be better off choosing term life insurance. If you want to leave your family with a cash gift or inheritance, you should consider whole life insurance.
The cost of life assurance
Though it is one of the most expensive types of cover, peace of mind is priceless. Several factors can affect the cost of life assurance premiums, such as your:
- Age
- Health
- Occupation
- Smoking status
- Family medical history
- The type of policy you want
- The amount of cover you need
When you apply for life insurance, your provider will likely ask you some questions regarding these factors. This is a way for them to judge the likelihood of a claim being made. It’s essential that you answer all questions truthfully, if not your cover may be voided later down the line.
Age is one of the biggest factors in calculating the cost of life insurance. As you get older, you become more susceptible to developing health conditions, which raises your premiums. With life insurance, it’s always best to take out cover at an early stage to save money.
Where can I buy life assurance?
Life assurance can be purchased from a number of providers such as:
- Direct from an insurance company
- Life insurance brokers
- Online comparison sites
- Large retailers like supermarkets
- Banks
To get the best deals for life insurance cover, be sure to shop around. For advice on which policy is right for you, it’s worth speaking to a life insurance advisory broker. They can give expert advice as well as helping you find the best cover for affordable prices.
