What are the advantages of term life insurance?
It’s worth mentioning that both life insurance and life assurance share the same persuasive advantage: providing for your loved ones when you’re gone and the peace of mind that brings.
Much will depend on your stage of life and what you intend the insurance payout to cover should you die. For a young, healthy person, term life insurance is a consideration when buying a house or starting a family.
Decreasing cover
Decreasing cover is a form of term life insurance that is designed to cover the remaining balance on a reducing debt such as a repayment mortgage. It is designed to expire at the same time your mortgage is fully repaid, and has the advantage of covering this expense if you were to die during the term of your policy. The payout amount reduces broadly in line with your mortgage, however your premiums will remain the same throughout.
Decreasing cover usually has an interest rate cap, meaning if your mortgage’s interest rate is higher than your insurer’s cap, the payout might not completely cover your outstanding repayments.
Level cover
Level cover offers a payout of a specific amount. If you’ve calculated your family’s cost of living and know what they’d need to continue life as they know it without your input, then level cover can provide peace of mind that they won’t need to undergo dramatic upheaval should you die.
Remember inflation can mean the relative value of your payout goes down over time. While its numerical value will stay the same, the buying power of that amount of money may be less 30 years in the future, for example.
Increasing cover
Increasing cover has the same basic principle as level cover, however it increases annually during the term of the policy. Typically the increases are either by a fixed percentage or they’re index-linked, so rise with inflation. Indexes (also known as 'indices') track the relative costs of goods and services to chart the changing buying power of a currency (‘inflation’). Money tends to be worth less over time (think about the cost of a chocolate bar ten years ago compared to now), and so increasing cover uses the interest rate to increase your payout size to give you the same relative value as when you took out your policy.
Increasing cover will also mean periodically increased premiums with most insurers.
While everything depends on a person’s unique circumstances, it’s generally the case that for the same value of payout, decreasing term policies pay the lowest premiums and increasing term pay the highest.
What are the advantages of life assurance (whole of life insurance)?
It might seem at first, given the main difference between life insurance and life assurance, the latter is more tempting. Since the policy doesn’t expire, there’s no risk of you dying after the end of your contract and not receiving a payout. Yet because of this, premiums for lengthy life assurance policies (or those with large payouts) tend to be significantly greater than those of term life policies.
Policies designed for people entering later life (usually called things like over 50s life cover) are typically whole life policies that payout regardless of how long you live after you've taken out the cover.
Most often, this type of policy is used to contribute towards funeral expenses, pay outstanding minor debts or leave as a gift to family. Payouts are too small to contribute meaningfully to a mortgage, but some have the benefit of having a fixed length with respect to your contributions.
After the end of the payment term, your cover is still in place and will remain so until you die, but the premiums no longer need to be paid.
Which is right for me?
Whether to choose life insurance or life assurance needn’t be as confusing as their names might imply. Consider the above information, your stage in life and your plans for the future, check policies cover levels and terms closely, so you can make an informed choice between insurance and assurance that's right for you.