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Last updated: 10 February 2022
It is not uncommon for the terms ‘life insurance’ and ‘life assurance’ to be used interchangeably. However, there are a few key differences between the two that you should keep in mind before deciding which one is best for you. Rest assured that both of these policies have the common goal of ensuring that your loved ones and beneficiaries will be provided for when you pass away.
The main difference between the two is that life insurance covers you for a set period of time and has a predetermined payout in the event of your death within the policy’s term. Life assurance on the other hand covers you for your whole life but can be more expensive on a monthly basis.
Life insurance provides you with cover for a set amount of years (the policy’s term) and has a fixed payout amount in the case of your death within the term. This ensures financial stability for your beloved ones if you die while the policy is in place.
However, keep in mind that if you outlive the policy term established at the beginning of your contract, your beneficiaries will not receive any payments, even if the cover had been active for decades. In this sense, life insurance can be compared to car or home insurance, meaning that it only has value if a claim is made.
A life insurance policy can be arranged on a decreasing basis or a level basis. Decreasing term life insurance is often cheaper than others because the amount of cover will decrease over the years. This is a common option among people who wish to make sure that their mortgage will be paid in full in the event of their death.
With decreasing cover, you are able to set your payout to match your outstanding mortgage payments at the start of your policy. Therefore, if you die before completing all of your mortgage payments, your beneficiaries will be able to clear your mortgage with the sum left from your life insurance. But keep in mind that if you choose this option, your premiums will still cost the same throughout your policy term, even if the payout amount decreases.
Alternatively, you can choose to have level term life insurance in place. This type of insurance guarantees a fixed payout throughout the term of your policy, granted that the event of your death happens within the term. If you know precisely how much money your family would need to maintain financial stability in the case of your death, this might be a good option for you.
Benefits and Downsides
One of the benefits that come with a life insurance policy is that it can cater directly towards your needs. You as a policyholder are able to choose how long you would like to be covered for and the amount of payout you would like your beneficiaries to receive after your death. Additionally, because a payout is only guaranteed if a claim is made within the policy’s term, monthly premiums tend to be significantly cheaper than life assurance premiums.
Having these benefits means that if you plan ahead and know what you would like to get out of your life insurance, it can greatly work in your favour. However, it is very important to keep in mind when deciding which cover to get that a payout is not guaranteed with life insurance cover.
Even if you have been paying premiums every month for decades, you will only receive the set amount of payout if the policyholder dies within the specified term of the contract. If you die a few days after the policy expires, your beneficiaries will receive no compensation.
Contrary to life insurance which covers you for a set amount of time, a life assurance policy will protect you until the event of your death, regardless if that happens a couple of days or a couple of decades after you’ve signed with the insurer.
This type of policy is often referred to as ‘whole of life’ cover and a payout is guaranteed. Because of its long-lasting nature, there is the possibility that monthly premiums will be reviewed regularly, meaning they could potentially increase or decrease every few years.
Benefits and Downsides
One of the benefits of having a life assurance policy in place is that it can double up as an investment product (also known as an endowment policy) depending on which insurer you sign with. Part of your premium payment can go towards your final payout and part of it can be invested by your insurance provider.
Because of this, you could end up with a payout much larger and much more valuable than what you initially put in. But on the other hand, because the market fluctuates, your beneficiaries could be left with significantly less money than you intended.
One of the downsides of having life assurance is that this type of policy can be significantly more expensive than other life insurances. In a life insurance policy, there is the possibility that you will not die within the set period of your policy term, and the provider will therefore not have to make a payout.
Life assurance providers will certainly have to make a payout at some point because they cover you for your entire life. Because of this, their monthly premium payments are more expensive than life insurance premiums. When considering this option, it is important to understand the balance between what you are able to afford on a monthly basis and what you would like to leave behind for your dependents.
Which one is best for you?
Both life insurance
and life assurance policies aim to give you peace of mind that in the event of your death, your loved ones will be looked after financially. When it comes to choosing between a life insurance or a life assurance policy, make sure you keep in mind the differences outlined above in order to help you choose the option that best suits your needs.