Life assurance

What is life assurance?

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MoneySuperMarket’s guide to life assurance: a special category of life insurance with an indefinite term limit

Smiling elderly couple

What is life assurance?

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

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.

Most life insurance policies are taken out for a set period of time – or term – which usually lasts 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 a lump sum designed to cover the resulting loss of income.

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, as insurers know with a high degree of certainty that they’ll have to stump up in due course.

There’s generally no term limit, so your beneficiaries are almost guaranteed to receive a pre-agreed amount when you die. Some plans keep you paying until you die, though others have a cut-off point – often 85 or 90 – after which time 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: by paying pre-agreed monthly premiums. However, because the term length of life assurance is indefinite, these premiums are generally much more expensive.

However, as with regular life insurance, your premiums are affected by factors such as age, income and health.

How does life assurance work?

Generally speaking, 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 according to how high you want your pay-out to be.

They may allow you to review your policy after a set period in case your circumstances change – for instance, if you’ve paid off your mortgage early.

As well as agreeing a lump sum, there are some whole-of-life policies which are more investment-focused. In this type of life assurance policy, your insurer invests your monthly premiums, and your eventual pay-out is affected by how well these investments do.

With this type of policy, commonly known as a ‘maximum cover’ policy, your premiums will be regularly reviewed, and may increase as you get older.

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

When you die the assets you pass on are valued, and if it comes to more than £325,000 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 people can’t access your estate until the inheritance tax has been paid, they are often forced to take out a loan to cover the bill. Some people therefore choose to take out a whole-life policy and write it under trust in order to pay off any forthcoming inheritance tax their family may face and remove any roadblocks.

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

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 cancel early. If your provider allows this you’ll likely receive the value of the fund, or what you’ve paid, minus any penalty charges they levy. These may 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.

Should I take out life assurance?

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.

Life insurance is designed as more of a last resort, the peace of mind that your family will be able to fund themselves should the unthinkable happen. It’s an emergency measure to make sure they can keep up with the mortgage, for instance, and other bills.

Life assurance, on the other hand, 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 bequeathing cash to the next generation.

Getting a life assurance quote

Life assurance contracts are generally more complex 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 an insurer or friendly society.

 

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