Life Insurance vs Life Assurance: What’s the Difference?

How do they work?

Both types are designed to pay out if you pass away whilst your policy is active. You can leave your loved ones with the amount they need to carry on, such as help to pay the mortgage or to offset any inheritance tax.

In both circumstances, you must ensure you keep paying the premium for your policy. If you can’t continue to pay the premium your insurance will likely be cancelled, and you’ll no longer be covered.

How does life insurance work?

When you first consider life insurance, you’ll commonly have a purpose for it in mind. It could be to protect your children as they get older, to help your spouse pay off the mortgage or to cover a large gift to a loved one. You’ll choose the period you want to be covered, for example to match your mortgage term or to a chosen retirement age, as well as how much life insurance you want.

If you pass away before your policy expires, your loved ones will receive your death benefit, as long as you kept up your premium payments whilst alive. After a claim has been made and verified, this is normally shared with your family. At LV=, we aim to pay within three days of a claim being confirmed.

However the important thing to understand is that if you outlive the period of time your life insurance policy lasts, you’ll no longer be covered. Depending on your age, you may or may not be able to purchase another policy. Most providers have policy terms that say your life insurance must end by a specific age, for example your 90^th birthday, and will specify the maximum age you can start a policy, say 84 years.

How does life assurance work?

Similar to life insurance, when you first set up a life assurance policy, you’ll have a reason in mind for it. Normally, you might consider this kind of policy if you just want to ensure your loved ones financial security is always covered; this could be because you’ve started a family later in life and want the reassurance that your children’s financial future will be protected or because you have financial dependants like vulnerable adults that heavily rely on your care. Even if you pass away in your 90s, you’ve got the security that your loved ones are financially looked after.

Essentially, with a life assurance policy, you’re guaranteed a payout, as long as you kept to the terms of your agreement, and continued to pay your insurance premiums, whilst you were alive. The total amount will be paid out when you pass away, helping those that receive it to continue living with a level of financial comfort.

It’s worth noting that life assurance policies can last longer than 50 years, meaning your priorities might have changed by the time your loved ones come to claim your policy. Likewise, it’s possible you might outlive the people you wanted to benefit from the policy.

Which one is better?

Truthfully, it depends on you. You may want the constant guarantee your loved ones will be paid when you pass away, meaning a life assurance policy is right. On the other hand, you might only need cover for a set period of time, for example whilst you still have a mortgage, whilst your children are still financially dependent on you, or perhaps until you retire.

It’s also possible that neither policy is right for you, especially if you’ve paid off your mortgage, have no existing debts and your children are grown up and financially secure. The less reliance they have on your income, the less likely you’ll need a policy.

Which is the most expensive: life insurance or life assurance?

Typically, life assurance tends to be the most expensive, but it completely depends on your circumstances. As life assurance lasts for the rest of your life, however long that is, it’s likely to be more expensive as the policy will be guaranteed to pay-out at some point. Life insurance only pays out if you pass away during your chosen period of cover, so there’s a chance that the provider will never have to pay out a claim, so it’s generally cheaper. However, life insurance has the potential to be expensive too. This is determined by several factors, such as your age and your health conditions, including whether you smoke.

What can cause your life assurance or insurance policy to be expensive?

You might find you can get covered from as little as £5 a month; however this very much depends on your personal circumstances. These are some of the main things that affect the amount you’ll pay:

• Age: The age you purchase life insurance or assurance will affect the amount you pay each month. The younger you are, the cheaper it is likely to be.
• Lifestyle: Your life insurance or assurance premiums are generally higher if you smoke or drink. This is because smoking and excessive alcohol consumption carry a higher risk of early death. Smokers typically have higher insurance premiums, even if they only vape or use nicotine products. Premiums might also be higher if you partake in high-risk hobbies, like skydiving or mountain biking.
• Health: It’s important you share any pre-existing medical conditions or known family history with your provider. Whilst family history doesn’t always affect your monthly premiums, it’s vital you give your insurer the heads up for full transparency.
• Policy length: The amount of time you want on your policy also affects how much you pay. If you only want a five-year policy, but want to cover around £200,000 during that time, your premiums will typically be less than someone wanting the same amount of cover for 25 years.
• Cover amount: You could be covered from as little as £10,000 with some providers to around £1 million with others. The overall amount of cover you want will impact your monthly premiums, increasing as you select higher death benefits.
• Additional cover: It’s possible to request more cover and protection with your policy if you want critical illness insurance. Of course, this heavily depends on the provider and their offering. Critical illness provides an extra layer of security in case you or your children have a specified life changing or life limiting illness. Each provider will detail a list of critical illnesses they cover, potentially offering an early payout if either you (or with some providers also your children) are diagnosed with one of the listed conditions.

Can you get critical illness cover with both?

Critical illness cover could be available alongside your life assurance or life insurance policy, but this depends on the provider you choose. Some providers will only sell critical illness combined with a life insurance policy, whereas others will offer them separately.

Whilst life insurance and assurance payout when you pass away, critical illness cover can offer an early payment if you or your child (with certain policies) are diagnosed with a critical illness. Different providers will cover different illnesses, so it’s worth checking exactly what you’ll be protected against before you take out a policy.

Looking for life insurance with critical illness cover?

At LV=, we offer life insurance with the option of adding on critical illness cover, providing you and your loved ones with extra security. If you’re interested in applying for a life insurance policy get a quote today.

FAQs about life insurance vs life assurance

Can you claim a life insurance or life assurance policy early?

Normally, no, but there are some exceptions. If, for example, you have chosen to add critical illness cover to your policy, depending on the provider you go with, they may offer a full payout for the main conditions they cover or a smaller payout for other conditions. Also with some providers If you’re diagnosed with a terminal illness and have less than 12 months to live, you may be eligible for a payout.

However, if you decide your life insurance or assurance policy is no longer for you and cancel it, you won’t be able to claim the amount you’ve paid or any death benefit you have.

What happens to your policy when you die?

If you pass away, whilst your policy is in force, your policy will end and your loved ones could receive a payout. This all depends on if you continued paying your premiums whilst you were alive. If you had a joint policy with a partner, this will also usually end, depending on whether you have chosen for your cover to payout if the first one of you dies, or only when the second one of you dies.

If your policy ends before you pass away, you’ll no longer be covered unless you purchase a new life insurance policy.

Is life insurance and life assurance taxable?

The pay-out itself form the life insurance or assurance policy is not usually taxable when the money is paid out. However, if it is paid to your estate then it’s value will be added to the value of everything else you own when you die. If when combined this is over a certain limit, then your estate will need to pay Inheritance Tax.

Can you put life insurance and Life assurance in trust?

Yes, it’s possible to do this. With a life insurance or life assurance policy in trust, any payouts can be made quickly and efficiently to your loved ones.

Without a policy in trust, if you are the only person covered, it would payout to your estate, and your beneficiaries have to apply for probate. As this is a legal process it can take some time for your loved ones to receive their payout. At LV=, we typically aim to payout an insurance policy within three days once we’ve decided about your claim. However, if you need to apply for probate, we will need to wait for this process to be completed before we can pay a claim.

If a policy is held in a trust, it doesn’t usually form part of your estate, meaning the proceeds of the insurance policy can be paid out to your named trustees without the need for probate. This usually means that the proceeds can be paid to your beneficiaries by the trustees much quicker. Because the policy doesn’t pay to your estate it also means it won’t be included with the rest of your assets when you die, to work out whether any inheritance tax is due.