Guide
Life assurance vs life insurance: what’s the difference?
It’s easy to think that life assurance and life insurance are the same thing. They certainly sound very similar and are sometimes used interchangeably. But there are key differences between the two types of product, which are useful to know so that you buy the right cover.
In this guide we’ll explain these differences and how each one works. This should give you a clear understanding of the differences between life assurance and life insurance.
What is life assurance and insurance?
In a nutshell, both types of insurance pay out on death. Life assurance pays out when you die – whenever that may be. Life insurance pays out if you die during the time the plan is in place.
Life insurance
Life insurance gives your loved ones a cash lump sum when you pass away or if you’re diagnosed with a terminal illness. They can use the money for anything, like paying off a mortgage and funeral costs.
Life insurance is used as shorthand for term life insurance. Term life insurance covers you for a chosen number of years, which is called the ‘term’ of the policy.
If you die within your chosen time frame, say 25 years, then your beneficiaries will receive a cash lump sum. If you die after the 25 years have expired, then they won’t receive anything.
There are different types of term life insurance. For example, decreasing term insurance can be used to cover the cost of paying off a repayment mortgage. The amount of cover decreases as you pay off your mortgage. Level term insurance pays out the same amount for the duration of the plan. And with increasing term insurance the cover amount rises each year in line with inflation. This helps your cover keep track of the cost of living.
Learn more: Term life insurance explained
Life assurance
Life assurance also gives your loved ones a cash lump sum when you pass away. But unlike term life insurance which has an expiry date, life assurance covers you until you die.
When you die, the payout goes to your beneficiaries. This type of insurance is often used to help pay an inheritance tax bill, so the cost doesn’t need to come out of your estate. Or some people use it to cover funeral costs.
Life assurance is guaranteed to pay out as long as you keep paying your premiums. Whole of life insurance and over 50s life insurance are both types of life assurance.
Learn more: Whole of life insurance explained
Learn more: Over 50 life insurance explained
What's the difference between life assurance and insurance?
Comparing life assurance vs insurance.
|
Life insurance |
Life assurance |
What it does |
Pays a tax-free lump sum if you die or are diagnosed with a terminal illness while the plan is in place.
|
Pays a tax-free lump sum when you die. |
Purpose |
To provide financial security to loved ones.
|
To provide financial security to loved ones. Can be used to pay an inheritance tax bill as well.
|
Types of cover |
Decreasing Level Increasing
|
Level Increasing |
Length of plan |
You can choose how many years you want the plan in place for.
|
Lasts for the whole of your life. |
Age limit |
Can usually only be bought up to age 75.
|
Can be bought at any age.
|
Medical questions |
You’ll be asked about your health and lifestyle. |
You may be asked about your health and lifestyle.
Over 50s life insurance policies don’t usually ask any medical questions.
|
Cost |
Cover from as little as £5.00 per month. |
Monthly premiums will probably be higher as the payout is guaranteed.
|
Suitable for |
Families with dependants. People with debts such as a mortgage.
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People who want to cover their funeral costs. People who want to pay an inheritance tax bill.
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Should I choose life assurance or life insurance?
When looking at life insurance vs life assurance, think about what you need the payout for.
Both policies are designed to pay out when you die. But life insurance has an end date, whereas life assurance runs for the rest of your life.
This makes life insurance useful for paying off debts that also have an end date, such as a mortgage or large loan. There are a range of life insurance policies tailored to the type of mortgage you have. Repayment mortgages can be covered by decreasing term insurance. Interest only mortgages by level term insurance.
Raising a family can be very expensive. Providing for your children if you die is one way to make sure they’re financially secure. It’s particularly important if you earn more than your partner or are a sole parent. A life insurance payout can help to:
- pay for day-to-day living expenses,
- cover education costs,
- maintain your family’s standard of living,
- supplement a lack of savings.
As life assurance runs for the rest of your life and is guaranteed to pay out, you know for certain your loved ones will receive a cash payout. This makes it useful for paying bills incurred when you die, like inheritance tax and funeral costs.
Any payments to your beneficiaries from life insurance or assurance will not be taxed for income or capital gains. However, unless the policy is in trust, the payout will become part of your estate and may be liable for inheritance tax.
If you think you’ll need to pay inheritance tax on your estate when you die, you can take out a life assurance policy in trust to cover the tax bill. The policy sits outside of your estate, so is not subject to probate and can be paid quickly. This means the people looking after your estate can settle your inheritance tax bill.
Life insurance premiums tend to be cheaper than life assurance premiums because the cover has an end date. It pays out only whilst the policy is up and running. Once it comes to an end, the cover stops.
Because life assurance always pays out, the premiums can be more expensive. And you’ll need to keep paying them until you die. Although some providers cap payments at a certain age or after a set number of years, but allow your cover to continue until you die.
So, there are a few things to consider when deciding whether life assurance or life insurance is right for you. If you’re undecided about what to do, speak to your insurance adviser, or one of our team at Vitality.
Vitality life insurance
Want to know more about life insurance or thinking about taking out a policy? Here are some of the benefits of taking out life insurance with Vitality:
- A brand you can trust - In 2023, we paid out 99.7% of life insurance claims.*
- Get a lower monthly premium upfront when you add Optimiser to your plan. Keep your premiums low when you stay active.
- Access to Vitality partner discounts and rewards.
- Get free no-obligation advice. Our advisers offer expert advice to help you make the right decisions.
Life insurance vs life assurance FAQs
Can you claim a life insurance or life assurance policy early?
If you’re diagnosed with a terminal illness up to 12 months before the end of your life insurance plan, you can claim it early. You can’t claim life assurance early, because it only pays out when you die.
Is life assurance worth it?
Life assurance can be a bit more expensive than life insurance, but that’s because it’s guaranteed to pay out. It’s this guarantee that means your loved ones will definitely receive a tax-free cash lump sum when you die. For many people, this reassurance makes the cost worthwhile. It's also useful for inheritance tax planning, as the payout can be used to pay an inheritance tax bill.
Do you get any money back on life assurance?
You get money back from life assurance when you make a successful claim. Some providers allow you to borrow against a whole of life plan as well. However, it can be very costly to do this.
Can you cash out life assurance?
Some providers allow you to borrow against a whole of life plan or surrender it altogether. However, it can be very costly to do this. And if you surrender your policy, your loved ones won't receive a payout when you die.
Is life insurance and life assurance taxable?
Life insurance and life assurance are free from income and capital gains tax. However, unless you have put the policy in trust, the cash lump sum forms part of your estate for inheritance tax. This means it could be liable for inheritance tax at 40% if you have more than £325,000 of assets.
Does life assurance always pay out?
Yes in the vast majority of cases life assurance pays out. Some policies won’t pay out for suicide within the first few years of owning the policy. Your premium payments must be up to date as well.
Can you put life insurance and life assurance in trust?
Yes, you can. When you put a life insurance or assurance policy in trust, it no longer counts as part of your estate. This makes it very useful for inheritance tax planning. So, even if your estate is liable for inheritance tax, the life insurance policy goes to the people you choose. They can use this amount to pay your estate’s inheritance tax bill, pay off outstanding debts or use as they wish.
Can I sell my life assurance policy?
Relevant guides and articles
-
Is life insurance worth it?
If you’re thinking about getting life insurance but not sure if it’s worth it, this guide can help you decide. We look at the benefits of life insurance.
-
Life insurance premiums
How are life insurance premiums calculated? Here’s everything you need to know about premiums, how they’re calculated and things to consider.
-
Life insurance payouts
Find out how life insurance payouts work, what to do if you receive one and answers to other key questions. Read our guide here.