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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 Emily Sullivan

Published: 27 November 2020

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Looking for life insurance?

What is life assurance?

Life assurance is a type of life insurance that doesn’t have a term limit. Life assurance claims tend to be paid out no matter what age the policy holder is when they die – so long as they have kept up their monthly payments.

How does life assurance work?

At the start of a life assurance policy you choose how much you want the eventual lump sum to be. Your provider will then calculate your monthly premium.

As well as paying a fixed lump sum, some whole-of-life policies are more investment-focused. With this type of life assurance, your insurer invests your monthly premiums, and your eventual pay-out is affected by how well the investments perform.

Commonly known as a ‘maximum cover’ policy, your premiums will be regularly reviewed, and may increase as you get older.

Your provider may also allow you to review your policy after a set period in case circumstances change. A good example is when you’ve paid off your mortgage and your family wouldn’t need such a big pay-out should you die unexpectedly.

The lump sum from a life assurance policy can, with a degree of planning ahead, be received tax free. In fact, one of the most popular reasons people opt for this kind of cover is for tax planning purposes, particularly to help their family out with inheritance tax.

When you die, the assets you pass on are valued, and generally if it comes to more than £500,000 the remainder is taxed at 40%. Included in this threshold is the value of the family home, which puts millions of people in scope of inheritance tax.

However, because your estate can’t be accessed until the inheritance tax has been paid, beneficiaries are often forced to take out a loan to cover the bill.

Some people therefore choose to take out a whole-of-life policy and write it under trust to pay off any forthcoming inheritance tax their family may face and remove this roadblock.

Tax planning is not simple however, and anyone considering this option is encouraged to consult a specialist financial adviser.

What is the difference between life assurance and life insurance?

The clue is in the name. Life assurance is an assurance that you eventually earn a pay-out, whereas a life insurance policy will finish at the end of its term.

Most term life insurance policies are taken out for a set period, usually between five and 30 years. During the term of the contract, the policy holder pays a set amount of money – the premium – each month or once a year.

In the event of their death, their life insurance provider pays their dependents an agreed lump sum.

A life assurance policy, on the other hand – also known as ‘whole-of-life cover’ – is designed to last almost indefinitely. As a result, the monthly premiums are usually higher because insurers know that they’ll have to pay out in due course.

There’s generally no term limit, so your beneficiaries are guaranteed to receive a pre-agreed amount when you die. Some plans keep you paying until you die, but others have a cut-off point – often around 85 or 90 years of age – after which your cover continues but you no longer need to pay.

How much does life assurance cost?

You pay for life assurance in the same way you pay for any insurance policy, through pre-agreed monthly premiums.

Because the term length of life assurance is indefinite, these premiums are generally more expensive.

However, as with regular life insurance, your premiums are affected by factors such as age, occupation and health and how big you want the pay-out to be. To find out how much cover you might need, use our handy life insurance calculator.

Should I take out life assurance or life insurance?

While they ultimately serve the same purpose – paying a lump sum to your dependents in the event of your untimely death – life assurance and life insurance do have fundamental differences. You should consider what your goals are when taking out a policy.

Some people see life insurance as a financial safety net, giving you the peace of mind that your family will be able to fund themselves should you die unexpectedly. It can be looked upon as an emergency measure to make sure they can keep up with the mortgage payments and other bills.

Life assurance is perhaps better understood as an investment that pays out when you die. With its near-guaranteed pay-out and open-ended term limit, it’s a good way of leaving cash to the next generation, and it can be done in a tax efficient way.

Should I buy life assurance if I’m over 50?

If you’re over 50 and have a steady income which your family might not be able to do without, 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 for funeral costs, to pay existing debts or as a gift, you can also take over 50s life insurance.

Can you cash in a life assurance policy early?

Though life assurance policies are designed to pay out upon death, some providers allow you to cash them in early.

You’ll receive the value of the fund or what you’ve paid in premiums minus any penalty charges they levy.

A note of caution. Penalty charges tend to be substantial, meaning you end up with less than you paid in.

Be sure to check the terms of your life assurance policy before you take it out or – if you already have a policy – cash it in.

Do I also need critical illness cover?

Most insurers offer critical illness cover as an extra you add to a life assurance policy, while some also include it as standard. You may also be able to find standalone critical illness cover, but it isn’t as common.

Getting a life assurance quote

Life assurance contracts are more complicated products than life insurance policies, as they involve more of an investment structure.

MoneySuperMarket does not sell life assurance policies, but you’ll be able to find out more by speaking to a financial advisor or directly to a life insurance provider or friendly society.

If you want to consider life insurance, then you can compare quotes from our leading panel of insurers here.