In the third and final instalment of our Insurance Series we explore the differences between life insurance and life assurance. The first two articles in the series covered the reasons why you may need certain types of insurance and why putting an insurance policy into trust is a smart move. This month we go one step further and consider the specifics of life assurance vs insurance and which is best under what circumstances. For fully personalised advice, our team of independent financial advisers is always on hand to help – find us at www.plutuswealth.com.
What is the difference between the two?
Last month we looked at the types of life insurance that are available – here’s another reminder of what they are Among them was something called whole-of-life insurance. This is another term for life assurance. The other types, which apply for a fixed period of time – such as term or joint – are known as life insurance policies.
How does life assurance work?
Unlike other life insurance policies, life assurance is guaranteed to pay out when the policyholder dies – whenever that may be. This means that it is structured differently so that funds are available at any given time. A life assurance policy takes the form of an investment into which you pay monthly or annual premiums (there are one-off policy purchase options as well). These premiums are then used to pay into an investment fund set up for this purpose.
There are two types of life assurance policy:
- Unit-linked which means that the money you pay through your premium is split. Part of it will be used for the final payout and part of it will be invested in a fund.
- Unit-linked/flexible which is where your money if fully invested. With this option, the fund will be reviewed regularly to determine how it is performing. If it is not doing as well as expected, your premiums may need to increase. This is done so that there is enough in the fund to pay out the expected amount at the time of death.
Certain policies can be structured to allow premiums to end at a certain age, but most of them will continue until the age of 85.
Risks and rewards
As with any investment, there are risks and rewards to life assurance policies. The main ones to bear in mind are:
- Guaranteed payout. There is no expiry date on an assurance policy. It will pay out to your beneficiaries when you die, whenever that may be.
- A minimum payment will be made to your beneficiaries, linked to the value of the fund associated with the policy. If it has been performing well, there may be bonus payments paid out as well.
- The sooner you start, the better. The older you get, the harder it will be to find whole-of-life policies, and any medical conditions you may have developed will push up premiums.
- You can end the policy early. However, there will be penalties involved and you may end up getting less than your initial investment.
- You will be paying charges to the insurance provider who is managing the policy and fund on your behalf. This is something you will need to factor into your calculations.
- Premiums will be higher than for other types of life insurance. This is because a payout is guaranteed, unlike with a fixed-term policy.
When a life insurance policy may be a better option for you
Life assurance policies are not for everyone. It may be that you are looking for some peace of mind for your loved ones when you die so they can continue to pay bills and mortgages. This is especially important if they rely on your income to cover livings costs.
The main difference with a life insurance policy is that they have an expiry date which you can set. This could be the time at which you expect to have paid off a mortgage or when your children have left home and are no longer financially dependent on you. These types of life insurance policies set the payout amount to reflect your outgoings and are designed to pay off debts or provide sufficient funds to cover expenses. The downside is that once the expiry date is reached, there will be no payout if the policyholder is still alive.
Other types of policies
Life insurance can also be combined with other types of insurance, such as critical illness or income protection. These would cover you in case of serious illness, disability, or unemployment. Full details can be found in our earlier article in the series on other types of insurance policies.
Putting your policy into trust
Whatever type you choose, putting it into trust will save time and money for your beneficiaries by avoiding probate and reducing their inheritance tax bill. Last month’s article has full details on why writing an insurance policy into trust is beneficial.
Talk to an independent financial adviser
Life assurance policies are complex investments. They need careful consideration, and impartial advice will ensure you get the right product for your circumstances. Our Plutus Wealth team is experienced and fully independent. For an initial chat or for a more in-depth discussion on life assurance policies, get in touch with us on 20 7871 5200 or at email@example.com.