Life insurance vs life assurance: understanding the crucial differences
There is often confusion as to the difference between life insurance and life assurance. Although they may appear nearly indistinguishable at first glance, it is essential to understand the important differences between them when deciding which one could work best for you.
An overview of life insurance
Life insurance pays a set sum in the event of the death of the person(s) covered by the policy. Most policies are fixed-term, meaning that coverage only applies if death occurs within a fixed period of time such as a 5, 10, or 25 year period. The pay-out is a pre-arranged amount that often corresponds to a financial burden, such as a mortgage or a loan, guaranteeing that it is paid off in the event of a death. If the policy’s term ends while the holder is still alive then the policy becomes worthless. It retains no residual value of any kind and the money spent on premiums is lost, much like for other types of insurance like motor or home cover.
An overview of life assurance
Assurance, as the word suggests, is something that you can be ‘assured’ will occur. So with life assurance you are guaranteed a pay-out as long as cover is in place. The policy itself has financial value, much like a bond. Payment will be made either when the policy terminates or when the policyholder dies. Additionally, life assurance also invests your monthly premiums in an investment plan increasing the value of your policy over time.
Deciding what’s best for you
With two such broad and distinct options, you could be forgiven for thinking that finding the right cover would be simple. The truth, however, is that for many over 50s, especially those with pre-existing health conditions, finding the right policy can be difficult.
Life assurance, for example, may seem like a good choice. Your premiums are invested and you are assured a pay-out. Unfortunately, the guaranteed pay-out means much higher premiums. For older adults these premiums can be exorbitant and the limited investment returns over the course of their remaining lifespan can make life assurance a less than ideal choice.
Fixed-term life insurance is a lower cost option and is more popular than life assurance. Regrettably, this does little to benefit those over 50. Insurers, by nature, are risk averse and it can prove enormously difficult for those with health issues and advanced age to find an affordable fixed-term plan that meets their needs. Some insurers may offer affordable policies even to those with an existing medical condition, but will reject any cause of death linked to that condition.
Whole-of-life insurance policies are specifically designed to provide those aged over 50 with lifelong protection. These plans do not require a medical check, have low premiums, and provide a guaranteed pay-out at death. The catch is that they provide relatively small financial coverage, often just enough to cover funeral expenses. If you live long enough, the total of your monthly premiums may even exceed your guaranteed pay-out, which could lose you money. Many of these policies also maintain an initial wait period. So if you die within a fixed period, generally within 12-24 months of taking the policy, the pay-out will not exceed the sum of your premiums you have already paid. It is possible to find a whole-of-life policy that fits your needs but it is also important therefore to be aware of their limitations.
Of course there are many alternatives to insurance. Interest rates might not be at their best right now, but setting aside money each month in a savings or investment account could accumulate a significant amount of interest given a long enough time. These often provide greater flexibility and are not contingent on a monthly premium.
About the author: Matt Sanders is a spokesperson on life insurance for Gocompare.com. He has also commented extensively on a wide range of other money matters and closely follows the latest changes and trends in the sector.