The average man in the street assumes that Life Insurance and
Life Assurance are names for the same form of insurance. How
wrong they are! But don't hang your head in shame, many
financial commentators get it wrong too! Life Insurance and Life
Assurance perform different financial roles and are poles apart
in cost - so it helps to surf for the correct product.
Life Insurance provides you with insurance cover for a specific
period of time (known as the policy's "term"). Then, if you were
to die whilst the policy is in force, the insurance company pays
out a tax-free sum. If you survive to the end of the term, the
policy is finished and has no residual value whatsoever. It only
has a value if there is a claim - in that context it's just like
your car insurance!
Life Assurance is different. It is a hybrid mix of investment
and insurance. A Life Assurance policy pays out a sum equal to
the higher of either a guaranteed minimum underwritten by the
policy's insurance provisions or its investment valuation. The
value of the investment element is then a reliant on the
Insurance Company's investment performance and length of time
you have been paying the premiums.
Each year the insurance company adds an annual bonus to the
guaranteed value of your life assurance policy and there is
normally an extra "terminal bonus" at the end. Therefore, as the
years go by your life assurance policy increases in value as the
investment bonuses accumulate. The value of these bonuses are
then determined by the insurance company's investment
performance. Once investment value has been assigned to the
policy, you can cash it in with the insurance company. However,
most people get a far better price for their life assurance
policy by selling it to a specialist investment broker rather
than cashing it in with the insurance company.
If you were to die during a Life Assurance policy's term, the
policy pays out the higher of either the guaranteed minimum sum
or the accumulated value of the annual investment bonuses.
However, if you are still living when the policy terminates, you
usually get a bigger payout. This is because with most insurance
companies, an additional terminal bonus is awarded.
There is a also a specialised form of life assurance called
"Whole of Life". These policies remain in force for as long as
you live and as such, have no preset term.
There is also a practical difference for the internet user.
Whereas you can buy life insurance online, the Financial
Services Authority view life assurance as fundamentally an
investment product. As such they believe it is best suited to
being sold by a Financial Adviser with advice based on the
Advisors full understanding of your personal details. Therefore,
you will be unable to buy life assurance online. However, you
can use the internet to find a suitable financial adviser with
whom you can meet and discuss your requirements.
What are Life Insurance polices and Life Assurance policies used
for?
Life Insurance is usually a focal point of the family's
financial protection. It is ideally suited to ensure that known
debts such as a mortgage, are repaid in full in the event of the
policyholders death.
When it comes to providing a lump sum for general use in the
event that the policyholder were to die whilst the policy was in
force, either life insurance or life assurance can be used. The
differences are that with life insurance the size of payout
would be preset whereas with life assurance it would depend on
the guaranteed minimum and the insurance company's investment
performance. But remember, at the end of the policy's term life
insurance is worthless, whereas life assurance should payout a
sizeable investment sum. In this context Life Assurance seems
far more worthwhile but in practice more people elect for life
insurance. Why? It's a matter of cost. Life Insurance is
considerably cheaper than Life Assurance. Furthermore, in recent
years, investment returns on Life Assurance policies have fallen
significantly and many insurance companies have placed penalties
for cashing in policies early. This has adversely affected the
resale value of Life Assurance policies.
Finally, if you want a product to provide a lump sum on your
death whenever that is with a minimum payout guaranteed, you'll
probably elect for Whole of Life insurance. It's really a form
of lifetime investment with the benefit of a guaranteed minimum.
They're particularly useful for Inheritance Tax Planning.
About the author:
Michael Challiner has 15 years experience in financial services
marketing at senior level. Michael now works as the editor of
http://www.life-assurance-bureau.co.uk/life-insurance/ Futher
reading
http://www.life-assurance-bureau.co.uk/life-insurance/faqs/life-i
nsurance-faq-home.htm Futher reading
http://www.express-life-insurance.co.uk
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