How is life assurance different to life insurance?

Key takeaways

• Life insurance covers you for a specific term (e.g. 20 years). It pays out only if you die during that period. If you survive the term, no money is paid. It’s designed for the financial protection of your family and dependents.

• Life assurance is the same as whole of life insurance. It covers you for your entire life and is guaranteed to pay out whenever you die.

• Whole of life insurance or life assurance often includes an investment component, making it more expensive.

What are the key differences between life insurance and life assurance? 

Life insurance can be for a set term (length of time) or whole of life, while life assurance is always whole of life.

With term life insurance, a policy provides financial protection for a set period, paying out only if death occurs during that time. Life assurance or whole of life guarantees a payout whenever the death of the policyholder occurs.

How does life assurance work? 

Life assurance works by guaranteeing a payout to your beneficiaries whenever you die, as long as the policy is active. You pay regular premiums (monthly or yearly), and part of these premiums may also be invested, so the policy can accumulate a cash value over time.

Upon your death, the insurance company pays the agreed sum, called the sum assured, to your beneficiaries, providing them with financial support.

Can I have both life insurance and life assurance? 

Yes, you can have both types of cover at the same time.

People often do this to cover different needs—for example, life insurance can protect a mortgage or kids’ education for a set period, while life assurance ensures a guaranteed payout for your entire life. This way, you get both term-specific protection and long-term security.

But most people will only need one type of policy. Speak to a financial adviser if you are not sure what type of life insurance plan would be best for you.

What are the benefits of life insurance? 

Life insurance acts as a safety net that provides money to your beneficiaries after you pass away. This money can be used to cover essential financial obligations and giving you and your family peace of mind.

A life insurance payout can be used to cover costs such as:

• Mortgage repayments

• Everyday expenses and debts

• Funeral costs

• Childcare and university costs

• Property insurance, health insurance and motor insurance

What are the benefits of life assurance? 

Life assurance provides cover for your entire life, rather than for a set term. The payout is tax-free, and as long as premiums are paid, a claim can be made upon the policyholder’s death. You benefit from guaranteed lifelong protection, but this comes with higher premiums.

Some policies have a cash or surrender value.

How can life assurance help with estate planning?

Life assurance plays a key role in estate planning by ensuring that your assets are protected and your loved ones are financially secure after your death. Here’s how it works:

• Paying inheritance tax: The payout from a life assurance policy can provide funds to cover inheritance tax, so your heirs don’t have to sell assets to pay them.

• Providing liquidity: It gives your estate cash immediately, which can be used to settle debts, funeral costs, or ongoing expenses.

• Tax benefits: You can structure the policy so the payout is not subject to inheritance tax and goes directly to beneficiaries.

• Supporting dependents: Life assurance ensures that family members, especially those who rely on your income, continue to have financial support.

Who needs term life insurance and who needs life assurance or whole of life insurance?

How much do life insurance and life assurance policies cost?

Term life insurance is typically cheaper than life assurance. Costs can range from a few pounds a month to hundreds, depending on the sum insured and term length.

Life assurance is usually more expensive due to lifelong cover. Premiums can range from tens to hundreds of pounds per month, depending on the policy and individual circumstances.

Costs vary between insurance providers, so shop around for cover.

What factors affect the cost of life insurance and life assurance?

The cost of life insurance and life assurance policies depend on several factors:

• Type of policy: Term life insurance is cheaper than whole of life assurance because it only covers a set period. Whole of life assurance is more expensive since it guarantees a payout for your entire life.

• Age: Younger applicants generally pay lower premiums, as the risk to the insurer is lower.

• Health and lifestyle: Pre-existing conditions, smoking, and high-risk activities can increase premiums.

• Cover amount (sum insured): Higher payouts mean higher premiums.

• Policy term (for term insurance): Longer terms usually cost more than shorter ones.

• Additional features: Add-ons such as critical illness cover or income protection add to the cost.

In short, term life insurance is typically affordable and flexible, while whole of life assurance is more expensive but guarantees a payout.

To find the most suitable deal, compare offers with MoneySuperMarket to find the appropriate level of cover for your needs.

Are pay-outs from life insurance and life assurance taxable?

In most cases, life insurance and life assurance payouts are not subject to income tax in the UK—they are paid tax-free to your beneficiaries.

However, there are some important points to note:

• Inheritance Tax (IHT): If the policy is written in your name, the payout may be included in your estate and could be subject to IHT. Policies written in trust can usually avoid being counted in your estate, keeping the full amount tax-free.

• Investment-linked policies: For whole of life policies with a cash value or investment element, there may be tax implications on the growth if you surrender the policy early.

Can I cash out my life insurance or life assurance policy?

You can’t cash in term life insurance as it doesn’t have a cash value.

Some life assurance policies may offer a surrender or cash value . The surrender value depends on how long the policy has been active and the type of policy you hold.

How do I choose between life insurance and life assurance?

Choosing between life insurance and life assurance depends on your financial goals, responsibilities, and budget.

Consider your needs

If you want cover for a specific period—like until your mortgage is paid off or your children are financially independent—term life insurance is usually best.

If your goal is to guarantee a payout for your entire life or leave an inheritance, whole of life assurance is more suitable.

Think about your budget

• Term life insurance is generally cheaper and more flexible.

• The amount of cover will impact your premiums

• Whole of life assurance is more expensive due to guaranteed lifetime cover.

• Younger and healthier individuals often get lower premiums for both types.

• Whole of life policies lock in cover but can be costly if started later in life.

What are the common terms in life insurance and life assurance policies?

• Premium: The amount you pay for your policy, usually monthly or annually.

• Death benefit: The amount paid to beneficiaries upon the policyholder’s death.

• Term: The length of time the policy provides cover (for term life insurance).

• Cash value: The savings component of a life assurance policy that grows over time.

• Beneficiary: The person or people designated to receive the death benefit.

• Underwriting: The process by which the insurer evaluates the risk of insuring you, often involving a health assessment.

What happens to my life insurance or life assurance if I stop paying premiums?

If you stop paying your life insurance premiums, the policy will lapse, and you will lose your cover. The same applies to life assurance, the cover will stop and you will not get back any of the premiums paid.