Tuesday, November 4, 2008

Life Insurance vs Life Assurance

Anyone reading about insurance can be forgiven for thinking that the terms ‘life insurance’ and ‘life assurance’ are interchangeable, but are there any differences between the two terms and if not, why are there two different words for the same thing?

Put simply “insurance” is provided against an event that might happen whereas “assurance” applies to an event that will happen. So, insurance is a policy taken out against a risk, whereas assurance is one that is taken out against a definite event. The confusion about the seemingly interchangeable use of the two phrases occurs mainly because companies in North America refer to both assurance and insurance simply as insurance, and that habit has crossed the Atlantic.

For example, Whole of Life ‘assurance’ policies are taken out by people based on the fact that death is certain. They pay premiums to maintain the policy safe in the knowledge that their estate or dependents will receive an assured sum upon their death, whenever this happens. As it is certain (or assured) that the policy will have to pay out at some point, because it provides cover for the whole of someone’s life, it is known as life assurance. However, a life ‘insurance’ policy will only pay out providing all premiums have been maintained and that death occurs within a specified number of years, known as the policy term. As it is quite possible that the insured will not die during the policy term, this is known as life insurance

Another example of ‘insurance’ as opposed to ‘assurance’ is critical illness cover. Because the insured is obtaining cover against the possibility of contracting and being diagnosed with a critical illness, it is classed as ‘insurance’. Hopefully, when taking out such insurance it will not be required, but should such a situation arise then the insured will be paid a lump sum to help them provide for themselves and their family throughout their illness. Of course it is quite possible that the insured will not suffer a critical illness, and therefore this is known as insurance – something that might happen, as opposed to something that will.

There are many types of life insurance and life assurance policies available in the UK, and depending upon the term required and the age of the insured person some will be better to take out than others. Not everyone is in the same position nor requires the same type of cover and because life insurance and life assurance can be quite complicated anyone thinking of taking out a policy should consider seeking professional advice.

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