Insurance vs Life Assurance – Why one is better than the other?
It’s permissible to speak of ‘insurance’ in all cases. As with the term ‘Insurance’ it refers to protection against an event that might happen, such as a motor accident, a fire or a burglary. However both life insurance and life assurance refers to protection against an event that will definitely happen, such as the end of an individual’s life.
An insurance policy is taken out to prevent a risk or provide cover against a risk, However if the risk doesn’t occur, the sum insured will never be paid out. It’s often referred to as short-term and or general insurance.
The difference with Life insurance and assurance lies in how the policy is paid out. As life insurance it’s just like your car insurance in that it only has value if there’s a claim, like if you were to die whilst the policy is in force. The insurance company pays out a tax-free sum to your dependents. But if you survive to the end of the policy term the policy is finished and has no residual value whatsoever.
Life assurance is different in that it’s a hybrid mix of investment and insurance. You’d then get a payout 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 reliant on the Insurance Company’s investment performance and length of time you’ve been paying the premiums.
And each year the insurance company adds an annual bonus to the guaranteed value of your life assurance policy and there’s 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 is 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.
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.