What’s the difference between life insurance and life assurance?

Both life insurance and life assurance are designed to pay out on the death of the policyholder.

But they don’t work in the same way.

The key difference is that life insurance covers the policyholder for a specific amount of time (the term) and will only pay out if the policyholder dies within that term.

Life assurance, on the other hand, usually covers the policyholder for the whole of their life and guarantees a payout at the end of it, when they die.

What is life insurance?

Life insurance is designed to pay out a tax-free cash lump sum or monthly amount to help your loved ones deal with the financial impact of your death, should you die during the specified term of the policy.

You can choose how long you want the policy to last.

For example, you might opt for a term that coincides with the length of your mortgage. So, if you passed away during that period of time, before your home loan was paid off, the payout would help clear the outstanding debt.

Or you may want your policy to last until your children have finished their education and are less dependent on your finances, for example.

There are three main types of life insurance:

• Level cover - Pays out a fixed sum and your cover remains the same for the term of the policy
• Increasing cover - Your payout increases with time to reflect the effects of inflation
• Decreasing cover - Your payout decreases with time usually in line with paying off your mortgage

Once the policy term comes to an end, you’re no longer covered should you die.

What is life assurance?

Life assurance - also known as whole of life insurance - covers you for your entire life and guarantees a lump sum payout to your beneficiaries when you die.

The term ‘assurance’ is used because your beneficiaries are ‘assured’ of a payout, as long as your premiums are paid and up-to-date according to the rules of the policy when you die.

With whole of life assurance, you keep paying your premiums until you pass away. But some insurers allow you to stop paying once you reach a certain age, this is often 90 years old or once the policy has been running for a certain number of years.

Because the insurer knows it’ll have to pay out at the end of the policy, life assurance premiums are generally more expensive than life insurance premiums.

There are two main types of life assurance:

• Standard or balanced cover - Where your premiums remain the same throughout the policy and there’s a guaranteed fixed cash sum at the end of it
• Maximum cover - This is a type of investment-linked cover where the insurer invests your money in a fund. Your plan will be reviewed after a time and, depending on how the fund is performing, your monthly premiums could increase to maintain the amount of cover you have, or could remain the same, but with a decrease in your level of cover

Which is right for me?

It depends on your circumstances and the stage of life you’re in.

If you’re only concerned about being covered for a set number of years, then a life insurance policy could be the right option for you. For example, while you pay off your mortgage, or while your children are still at school and financially dependent on you.

If, however, you want a guaranteed payout when you die, no matter when that may be, then a whole of life policy might suit you better.

Some people take out a life assurance policy to leave a lump sum to pay for their funeral expenses.

It’s also a popular option for inheritance tax planning.

Normally, life insurance payouts are subject to inheritance tax if the total estate of the deceased is worth more that £325,000.

But if you write a life assurance policy in trust, it won’t be treated as part of your estate and so won’t be subject to inheritance tax.

Putting it in trust also means your benefactors can receive the money quickly, without having to go through probate.

Other life insurance options to consider include:

• Over 50s life cover is a type of whole of life cover where there are no medical checks and you’re guaranteed to be accepted if you’re between 50 and 80 years of age
• Family income benefit pays dependants a regular, tax-free monthly income for a limited time to replace your own should you die during the term of the policy
• Joint life insurance covers you and your partner under one policy. It pays out to the surviving partner when the other dies. After that, the policy automatically ends and there’s no further life cover for the surviving person. It’s usually cheaper than taking out two separate single life policies