Life Insurance Vs Life Assurance
A life insurance policy is a contract whereby an individual, the insured, pays premiums and the insurer agrees to pay a fixed sum in the event of death by accident. The buyer gets tax relief because they are buying an investment in their own life. The policyholder can choose how much money will be paid when they die. Life assurance policies on the other hand compensate beneficiaries on one's death regardless of cause or circumstances and offer investment potential too.
A life assurance policy is a contract whereby the insured pays premiums and the assurance company agrees to pay a fixed sum in the event of death by accident. In financial terms, it is a contract between an assured and insurer; as the assured is in effect taking out an insurance policy, but with some terms different from other types of insurance. In order for a life assurance policy to be valid, it must:
This acts as an indemnification for death by accident or sickness and also helps reduce premiums. It should be noted that life insurance does not have to end with death. However, if the policy holder lives beyond this limit, there will be no further payment made by the policy holder.
Very often life insurance policies are bought by governments for the benefit of their workers and their families. It is also sold to senior executives of corporations, multi-national companies, and millionaires. Life insurance is sold at any of these firms' offices, including banks and other financial institutions. Life insurance has been used for over 100 years without a major public blow-out to the economy or a major increase in mortality rates, as was hoped for when it was created. Life insurance has paid out income for over 120 years in twenty-one countries with no major economic consequences.
When John D Rockefeller (JDR) of Standard Oil died he left $1 million to his four children. The JDR's had no need to use life insurance because the company paid them very large salaries.
Life Insurance Policy Types
Life insurance policies can be divided into three main categories, depending on how the death benefit is paid out.
Here are some examples of each type:
Chances are, you have at least one life insurance policy in your name. Typically it covers you for certain events, such as losing your job (disability coverage) or dying from a non-catastrophic event (critical illness coverage). Since these policies aren't like traditional insurance they can't be lumped into any one main category, though certain types do overlap over time and place.
The most commonly sold of these policies is term life insurance, which covers you against death from natural causes for a specified span of time. Many people have term and whole life policies as part of their portfolio. Whole life insurance provides a cash value that can be tapped into if needed. The cash value is not necessarily worth more than the policy's face value, however, because the insurer has taken out interest on the cash amount and also paid out taxes on the interest thus earned. Universal life insurance is an updated version of whole life that allows for some flexibility in premiums, but most of it remains pretty expensive.
Catastrophic coverage is usually sold in the form of universal life and provides a death benefit that is paid to the beneficiary. This kind of policy covers things like accidental death, terminal illness, and wrongful death. Floaters are sometimes used with catastrophic policies. Floaters are like cash values in that they can be tapped into and there is no guaranteed payout at all if you are diagnosed with an expected life expectancy of over 10 years. But as opposed to cash values, floaters have their own guaranteed lifespan, and don't pay out until your insured becomes legally dead (such as when they've passed away following a motor vehicle accident).
Traditional term insurance usually purchases a fixed amount of coverage for a specified period of time or term. This coverage can be expanded by adding additional insurance. It covers events that are not considered "catastrophic," yet the amount of income lost can be significant.
The most popular term insurance products are less expensive than whole life and universal life policies, but they have a number of downsides, including the high likelihood of a payout being delayed or not at all if you do pass away within the policy's lifespan. This type of policy requires relatively low premiums to purchase, and they provide more flexibility through variable premiums.
Whole life or universal life policies are like term insurance with one major difference: rather than providing for a certain period of time, they provide for an unending period (usually until death). This type of insurance requires more upfront premium, but provides the most insurance with peace of mind. The premiums are generally higher than for term life and variable premiums can sometimes be more expensive. Universal life policies also require that you keep paying premiums every year, in addition to your initial amount (a policy may have a term of 20 years and a maximum payout is $200,000).
The traditional life insurance company has pretty much died out in recent years due to competition from online financial services companies such as eMoney.com. They are still alive in the UK and they still write entire life policies but they no longer sell individual parts of the policies. That said, some insurance companies still sell whole life policies in the UK and are listed at the bottom of this page.
Universal life insurers often offer very inexpensive term insurance policies to individuals and some even offer an unconditional cash surrender value. This means that you can redeem the policy if you wish, at any time for its full value. It is possible to convert an existing whole life policy into a universal life policy or vice versa. The most common type of universal life policy is the variable universal life (VUL) which allows you to select a preferred pension age and it provides protection against non-catastrophic events only. In many cases these benefits can also be bought as cash values on other types of traditional insurance as well.
Term insurance usually only provides for a certain period of time and then becomes invalid, as in the case of a term insurance policy that lapses. But some policies will provide a rider that allows for a refund of premiums if you cancel your policy before it lapses. As this rider is included in the cost of the policy you do not lose any money by doing so, but some politicians are pushing to make this rider optional and charge for it which means that consumers may instead chose to pay more up front in order to keep their money from being refunded if they need it sooner rather than later.
Conclusion
Whole life or universal life is a bit more complex in terms of how it works as the premiums are not guaranteed by any specific period of time. This means that you may be paying for coverage that you won't need for decades on end. However, the benefits are usually much better than in terms of cash value and term insurance. Many people also opt to buy other types of traditional insurance policies (medical, disability, critical illness) with their whole life policy, as well as some cash value policies to park money aside and grow it over time. The typical British family will have four different types of insurance policies all aimed at protecting them against different hazards: term, cash value, whole life and other traditional insurance.