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Life assurance

What is life assurance?

Our guide will help you find out more about this specialist category of life insurance that won’t run out in your later years

By Jessica Bown

Published: 02 September 2021

Smiling elderly couple

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What is life assurance? 

Life assurance is a type of life insurance that runs indefinitely – the only reasons a life assurance policy comes to an end are that the policyholder dies or stops paying their monthly premiums. 

In other words, as long as you keep making the payments, life assurance will pay out at whatever age you pass away, which is why it is often known as whole-of-life insurance

Life assurance premiums tend to be higher those for a life insurance policy that lasts a set amount of time, say 25 years. However, life assurance can be useful for inheritance tax (IHT) planning, as there are ways to avoid paying IHT on life assurance pay-outs. 


What is life insurance?

Life insurance is designed to protect your loved ones by paying out a tax-free sum to the beneficiary or beneficiaries of your choice if you pass away during the agreed term of say 20 or 30 years. If you live longer than the term, the policy ends and no payout is made.

When you take out a life insurance policy, you can choose how long it runs for and who the money goes to in the event of your death. Many people take out life insurance that ends when they stop working, for example, or to run alongside a big financial commitment such as a mortgage. 

You can also choose between three different types of cover:  

  • Term life insurance pays out the same amount throughout the term of the policy
  • Decreasing-term life insurance pays out less the longer you have it (often in line with how much you owe on your mortgage)
  • Increasing-term life insurance pays out more over time to account for higher living costs (inflation)

The premiums you pay will depend on the type of cover you choose, as well as other factors such as your age, your lifestyle, and your medical history. 


What’s the difference between life insurance and life assurance?

The main difference between life assurance and life insurance is that a life insurance policy has a fixed end date. So, while you are guaranteed a payout with a life assurance policy – as long as you pay your premiums – a life insurance policy will only pay out if you die within the term. Both types of policy also come with pros and cons:


Life assurance pros

  • Offers whole-of-life cover, meaning your loved ones should receive a payout however long you live
  • Can be used for IHT planning and investment purposes

Life assurance cons 

  • Higher premiums – you pay more and for longer than with a life insurance policy 

Life insurance pros

  • You choose the length of time the policy runs and whether the payout goes down, goes up, or remains the same over time
  • The monthly premiums are lower than with life assurance, especially if you choose decreasing-term cover

Life insurance cons

  • The cover only applies during the term, so if you pass away one day after that, your family gets nothing


How does life assurance work?

When you take out a life assurance policy, you choose the size of the eventual lump sum payout, and your provider uses this to calculate your monthly premiums. 

You may also be able to choose whether the payout is fixed or can go up and down based on the performance of the insurer’s investment portfolio. This can lead to a larger lump sum but may mean you have to increase your premiums if stock markets fall. 

Once the policy is set up, you may be able to modify it to account for a change in circumstances – although only usually after a set time has passed. Otherwise, all you have to do is keep paying the premiums each month until you pass away. 

Some insurers have a cut-off age, usually around 90 years old, after which you no longer have to pay premiums – but your loved ones still receive the agreed sum when you die. 

If you want to use a life assurance policy for tax planning purposes, for example to help your loved ones cover an IHT bill, you will need to write it in trust to avoid it too attracting the 40% tax. The best way to do this is via a qualified accountant or a financial adviser.


How much does life assurance cost?

As with life insurance, life assurance premiums are paid monthly and are affected by various factors including your age, your occupation, and how much you want the policy to pay out when you die. 

The fact the cover is for the whole of your life means the insurer is more or less guaranteed to have to make a payment, so the premiums for life assurance are generally higher than for a fixed-term life insurance policy that might never result in a claim.

However, you can keep costs down by shopping around for the best deal and only taking out the cover you need. Our handy life insurance calculator can help you work out what level of cover is right for you.


Who is life assurance for?

Life assurance is a good choice if you want to make sure your loved ones receive a payout whenever you pass away. However, most people use life assurance polices for IHT planning, both as a means of protecting the policy value from IHT and as a way of giving their beneficiaries a lump sum with which to pay the IHT bill on their estate. 

Remember, though, that life assurance pay-outs can only be sheltered from IHT within a trust. If you do take out a life assurance policy, it’s also sensible keep a record of it (and ideally inform those who stand to benefit). Otherwise, the policy could be forgotten, meaning the money you have paid in premiums is wasted because your loved ones never receive a payout.


Do I need life assurance if I’m over 50?

If you’re over 50 and have a steady income that your family depends on, a life assurance policy is a good way to make sure they can survive without you. Likewise, if you have a mortgage your partner may struggle to pay on their own, life assurance can help.

if your family doesn’t need your financial support, but you would like to leave them with a lump sum to cover funeral costs, pay existing debts or simply as a gift, you can also take out over 50s life insurance.


How does a life assurance policy pay out?

A life assurance policy pays out on the policyholder’s death. So, if you need to make a life assurance claim, you should contact the policy provider as soon as possible after his or her death. 

The claim will then be assessed, which will usually involve the claimant providing various pieces of documentation, such as the policyholder’s death certificate. Once the claim has been approved, the payout will then be made to the policyholder’s personal representative, usually the executor of his or her will. 

The policy type and wording determines who can claim on a life assurance policy. If, for example, it is a joint policy, the payout will go to the surviving policyholder, with half the sum assured now considered as part of the deceased policyholder's estate. If it is a single life policy that has been put in trust, the lump sum will go to the trustees, who will then pass it on to the beneficiaries of the trust.


Can I cash in on a life assurance policy early?

Life assurance policies are designed to pay out when you die. However, some providers will allow you to cash them in early. 

If you choose this option, you’ll receive the value of the fund (or what you’ve paid in premiums) at that time, minus any penalty charges. But beware: the penalty charges on life assurance policies tend to be substantial, so you may end up with less than you paid in. 


Do I also need critical illness cover?

Most insurers offer critical illness cover as an extra type of protection that you can add to a life assurance policy. Some companies even include critical illness protection as standard, while it can also be bought as a standalone policy.

Whether or not you need it will depend on whether or not your family would need a lump sum (over and above any other insurance pay-outs they may receive) to manage financially if you were affected by a serious illness such as cancer, or became unable to work, for example due to a stroke or a heart attack. 


What type of life policy should I choose?

Both life insurance and life assurance are designed to protect your loved ones by paying out a lump sum in the event of your death. The right type of policy for you will therefore depend on your circumstances, as well as what you want to achieve.

Life insurance serves as a financial safety net for your family should you die unexpectedly; it offers the peace of mind of knowing they will be able to keep up with mortgage payments and other bills.

Perhaps the best way to see life assurance, meanwhile, is as an investment for your loved ones’ future; it’s a good way of leaving cash to the next generation, and it can be done in a tax efficient way. Just remember to think carefully about whether you will be able to keep making life assurance payments in old age, as stopping them often means no payout and could also result in you losing the money paid in so far.

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