Why life insurance is more puzzling than Einstein
One new survey suggests the distinction between life insurance and life assurance is even more puzzling than Einstein's theory of relativity!
Modern life is full of things that puzzle me. If the universe is expanding, what is it actually expanding into? Why can my one-year old son work the timer settings on our TV better than I can? Who or what is Jessie J?
It's not just me that finds so many things baffling, though. A survey has been conducted by Puzzler World, to coincide with the game's 2012 launch, to identify the 50 biggest conundrums of modern Britain, with interesting results. It turns out that humble old life insurance is more puzzling than Einstein!
Life insurance vs life assurance
In eighth place in the top 50 is the difference between life insurance and life assurance. This distinction is so baffling that it came ahead of Einstein's theory of relativity, the laws of cricket and crop circles in the list!
The simple answer is that insurance is cover against something that might happen. Assurance is cover against something that will definitely happen.
The trouble is that the terms have become interchangeable to the point that any distinction is effectively meaningless. So, for example, if you want cover against the possibility of you dying within a set period – so by no means something that is certain to happen – in theory you should buy a term insurance policy. Sadly, many insurers will still refer to it as a term assurance policy!
Here's an example. If you go the Legal & General website and click the life insurance tab, you are immediately presented with a page explaining what life assurance cover can offer, even though the product the firm is selling is essentially life insurance not assurance as it only offers cover for a specified period!
Is it any wonder people are confused?
All you really need to know is that in practice the terms are used interchangeably to mean the same thing. Unless the cover is 'whole-of-life' then your cover only applies for a specified term. More on this later!
Do I need life cover?
It's not just the jargon that gets many of us in a tangle about life insurance/assurance. For starters, many are unsure whether it's even necessary, or affordable.
Life cover pays out to your loved ones should you die within the covered period. So if you have a wife, kids or significant others, it's worth getting some form of cover to ensure they are not left out of pocket should you pass away.
If you don't have any loved ones that will suffer financially from your death, then in all likelihood life insurance is something you can do without.
As for the affordability, life insurance suffers from the misconception that it is an expensive piece of cover. In reality, it's really pretty cheap, and has been getting cheaper for the last decade. A 30-year old non-smoking male can get 20 years of cover, worth £200,000, for less than £10 a month!
So if we've established that you do need life insurance, now you need to work out which type of life insurance is right for you.
Level term cover
Thankfully, once you get past the insurance/assurance debacle, the names of the various forms of life cover are fairly self explanatory. Level term cover offers a set amount of cover (say, £200,000) for a specified period (the term).
So let's say you got £200,000 worth of cover over a 30-year term. No matter whether you die in year one of your policy or year 29, your loved ones will receive the full payment of £200,000.
Decreasing term cover
As the name suggests, decreasing term cover offers cover which gets smaller over time. This is typically taken out by people who are primarily focused with ensuring their cover will pay off the mortgage should they die.
So using the above example, should you die halfway through your policy, your family will get about £100,000.
The reason this is attractive to many is that it works out cheaper than going for level term cover. For a 30-year old, non-smoking male to get £200,000 worth of cover on a 30-year term, level cover would work out at £10.83 a month (from Ageas).
However, decreasing cover could be bought as cheaply as £8.39 a month (from LV=).
Increasing term assurance
Again, pretty self explanatory. Increasing term assurance offers cover that increases in size each year.
The important selling point here is that there's no need for a medical each year as the level of cover grows. And a growing level of cover can be pretty useful, given the way your circumstances may change (a bigger mortgage, more kids, etc).
With term cover, if you die the day after that term comes to an end, your loved ones won't get a penny. If you want to ensure that your family gets a payout whether you die at 39 or 89 then whole-of-life cover is for you. Be warned though, the fact that you are not only insured for a specific term means that the cover will be more expensive.
Family Income Benefit
The final type of cover I'm going to highlight is Family Income Benefit. This can work out as much as 30% cheaper than the more traditional types of life insurance, and is slightly different in that it pays out a monthly income to your surviving family, rather than a lump sum. This can make life easier for them as they don't need to worry about where to put such a large amount of money, nor the costs of maintaining an investment strategy (fees, commission and tax for example).
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