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

12 minutes

You might want security for life or just a short-term investment. Whatever your circumstances, either life insurance or life assurance could support you

We all want our family and loved ones to be looked after, especially once we’re gone. That’s where either a life insurance or life assurance policy comes in handy. Whilst there are differences between the two, both types of policy can payout in the event of your death, giving your loved ones the financial support they need. 

The information on this page should not be considered as financial advice. If you are unsure what’s right for you, please make sure you speak to a financial adviser.

Firstly, what is life insurance?

Life insurance is designed to support your loved ones if you suddenly pass away. In the event of your death, your beneficiaries will receive the death benefit the policy provides. Many choose life insurance for its security and peace of mind.

When you first take out a life insurance policy, you’ll be asked to specify how long you want the policy to last. Normally, and this heavily depends on your provider, you can have a policy for between five and 50 years. You’ll also need to specify what your amount of death benefit will be. Again though, amounts of cover available will depend on your provider.

Essentially, if you pass away whilst your policy is active, it will pay out to your loved ones. There are a few circumstances when this won’t happen, such as if you fail to pay your premiums, provide incorrect or misleading information when setting your policy up, or with LV= if you intentionally take your own life within 12 months of taking out your policy.

And, what’s life assurance?

Life assurance pays out a lump sum to your family or loved ones when you pass away. Just like life insurance whilst you’ll request cover for a certain amount, you won’t be asked how long you want your policy to last. Life assurance only expires when you die, meaning your policy could last for much longer, seeing you well into your 90s or 100s if it needs to.

So, you’ll rest in the knowledge that, if you pay your premiums, your insurance will last for the rest of your life.

So, what’s the difference between life assurance and life insurance?

You might be wondering whether life insurance or life assurance is the right choice for you, especially if you’re looking for extra peace of mind for your loved ones. In some cases, life insurance might be a better option for you versus life assurance. Alternatively, you could have a life-long guarantee if that’s what you wanted.

Life insurance

Life assurance

  • You’re covered for a specified length of time (known as the term), that you choose, between the providers minimum and maximum. Once your policy finishes, you’re no longer covered.
  • You’re covered for the rest of your life, meaning you’ll never have to worry about purchasing another policy unless you want to.
  • Your loved ones will only receive a payout if you pass away during the term of your policy. If your provider offers terminal illness cover, it might pay out before you die.
  • Your loved ones will receive a payout whenever you pass away as long as you continue to keep paying for your insurance policy.
  • Premiums are often cheaper as your policy only covers you for a certain period of time so if you don’t pass away during the policy term, your policy ends and your loved ones won’t receive a payout.
  • Premiums are often more expensive than life insurance because the policy will at some point have to pay out, as it covers for the rest of your life.

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 90th 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.