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Understand life assurance and how it differs from life insurance

Rachel Ditchburn
Written by  Rachel Ditchburn
Rebecca Goodman
Reviewed by  Rebecca Goodman
5 min read
Updated: 03 Feb 2025

Life assurance and life insurance are both policies which pay out a sum of money if you die. However, they work in different ways, and here we explain how each works so you can decide which might be right for you.

Key takeaways

  • Life insurance pays out a sum of money within a set time frame, such as a 20-year period

  • Life assurance guarantees a pay out to your loved ones no matter when you die

  • There are lots of different types of life insurance to choose from, tailored to individual needs and budgets

Life insurance and life assurance are types of insurance which can be used to help your financial dependents when you die.

Life assurance is also known as whole of life insurance confusingly and while MoneySuperMarket does not offer whole of life insurance, it does provide deals on other types of life insurance.

These include over 50s life insurance policies, and level term and decreasing term policies.

Smiling elderly couple

What is the difference between life insurance and life assurance?

Although they sound the same, these are two different types of life insurance product. In short:

Life assurance, also known as whole of life insurance, is a policy that will pay out a sum of money no matter when you die.

Life insurance is usually referred to term life insurance – which pays out a fixed sum of money over a set period of term, or decreasing life insurance, which pays out a decreasing amount of money over a set period of time.

How does life assurance work?

Life assurance is a unique type of life insurance that offers a guarantee that your loved ones will receive a payout whenever you die, as long as monthly premiums are met.

When you decide to take out a life assurance policy, you'll select a payout amount that suits your needs and budget. Your monthly premiums will be calculated based on this figure, alongside other factors such as your age, health, and lifestyle.

Some policies offer the flexibility to stop paying premiums after reaching a certain age while still maintaining coverage.

Additionally, there may be an investment component to your policy, potentially increasing the value of the payout over time, though this does introduce an element of market risk.

Here are some of the main benefits:

There's no expiry date to worry about, no need to renew or face potential increases in premiums as you age.

Your loved ones will receive a set amount of money when you die, this may cover your whole life, or until you reach the age of 100, depending on the policy.

The payout can provide financial protection for loved ones and help them continue living their current lifestyle.

Life assurance benefits

How much does life assurance cost?

The cost of life assurance is influenced by lots of different factors. These can include:

  • 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.

Mortgage considerations

For homeowners, life assurance is an essential consideration. It acts as a financial safety net for dependents, ensuring that they won't be burdened by mortgage repayments in the event of your passing.

A decreasing term life insurance policy is a cost-effective alternative that aligns the coverage amount with the diminishing balance of your mortgage.

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.

Is life assurance or life insurance better for me?

If you are comparing whole of life insurance (or life assurance) to fixed term or decreasing term life insurance, there are lots of things to consider. These include:

  1. The cost of the policy premiums

  2. How much you are covered for – and how much your loved ones will receive

  3. If there is a limit on the time period when a claim can be made

  4. What the money will go towards

  5. If the amount of money paid will stay the same or change over time

  6. When money can be accessed

  7. What taxes are due, and if you need to put the policy in trust

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.

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