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.