What is life assurance?
Key takeaways
Life assurance guarantees a pay out to your loved ones no matter when you die
It can be used for leaving money behind for loved ones, paying off debts, or contributing to funeral costs
Because a payout is guaranteed, premiums are typically much higher than term life insurance
What is life assurance?
Life assurance, also known as whole of life insurance, is a policy that lasts your entire lifetime and guarantees a lump-sum payout to your loved ones whenever you die, provided you keep up with your monthly premiums.
How does life assurance work?
Instead of lasting for a fixed number of years, your life assurance policy covers you for your entire life. As long as you keep paying your premiums, the insurer guarantees a payout when you die.
When you decide to take out a life assurance policy, you'll select a payout amount that suits your needs and budget and choose your beneficiaries.
Your monthly premiums will be calculated based on this figure, alongside other factors such as your age, health, and lifestyle.
What is the difference between life assurance and life insurance?
The main difference between life assurance and life insurance is that life assurance provides cover for your entire life and guarantees a payout when you die. Life insurance, however, covers you for a fixed period of time:
Policy feature | Life assurance | Life insurance |
|---|---|---|
Cover length | Whole life | Fixed term |
Guaranteed payout | Yes | No |
Pays out if you die during the policy | Yes | Yes |
Pays out whenever you die | Yes | No |
Typical cost | £19.30 | £40-102 |
What are the pros and cons of life assurance?
Like any type of insurance, it's worth weighing up the pros and cons before you commit to a policy:
Pros of life assurance
Guaranteed payout when you die
Covers you for your whole life
Can help with funeral costs or inheritance planning
Provides long-term financial security for loved ones
Cons of life assurance
More expensive than term life insurance
Premiums can increase on some policies
May not be cost-effective for temporary needs like mortgages
Requires ongoing payments to keep cover active
How much does life assurance cost?
According to market averages, the cost of a life assurance policy is between £40-102, but your policy price is influenced by lots of different factors, including:
Your age
Your profession
If you smoke
Your health (and if you have any pre-existing conditions)
Your cover amount
Usually, a whole of life insurance policy will be more expensive than a standard life insurance policy, because it is covering your life for a longer period of time.
When is money paid out with life assurance?
The payout process for life assurance works in a similar way to standard life insurance policies. The lump sum is directed to a named beneficiary, the surviving policyholder in joint policies, or trustees if the policy is held in trust.
This ensures that the funds reach the intended recipients with minimal complications.
Do I need to buy an extra policy?
If you’re considering buying life insurance or assurance, you may also want to consider critical illness cover. This is often added to life insurance policies and it can provide a lump sum of money to you if you are diagnosed with a specific illness and can no longer work.
Is tax due on life assurance?
The final payout from life assurance is typically free from most taxes, but inheritance tax could take a significant bite out of your estate without careful planning.
Setting up a trust is a strategic move to avoid this tax, which can be done by talking to your insurance provider.
As always, we recommend speaking to a financial adviser for more guidance.
Frequently asked questions
Is life assurance the same as a pension?
No, life assurance is not the same as a pension. Life assurance provides a tax-free payout to a chosen beneficiary upon the policyholder's death, covering them for their entire life. In contrast, a pension is designed to provide income to the policyholder during retirement while they are still alive.
Can you cancel life assurance?
Yes, you can cancel life assurance. If you no longer need cover, canceling might be the best option, but it's advisable to consult with your adviser, broker, or insurer first to consider all scenarios. Keep in mind that canceling means your cover will end.
How much tax is due on life assurance?
Generally, the payout from a life assurance policy is not subject to income or capital gains taxes.
However, there's a catch: a potential 40% inheritance tax on your estate if it exceeds £325,000. This hefty tax can be sidestepped by placing the policy into a trust, ensuring that more of your legacy goes directly to your beneficiaries.
Adding income protection to your life insurance policy is another tax-free option to consider.
Author
Rachel Ditchburn
Former Senior Commercial Manager
Rachel is a former Senior Commercial Manager at MoneySuperMarket, where she oversaw the Protection, Pet and Leisure Insurance channels. Outside of work, Rachel is a keen cook and enjoys live music,...
Reviewer
Collette Shackleton
Content Writer
Collette Shackleton is a highly skilled Content Writer who has over nine years’ experience creating helpful and engaging personal finance content for consumers. Collette shares her experience as a...
