Life assurance helps to protect against potential financial consequences occurring as a result of life’s uncertainties. By comparison, indemnity against the loss or damage of property is known as insurance. Insurance types include property and casualty (for motor vehicles, home and fire), and personal umbrella liability coverage. Life Offices issue assurance policies while Insurance Offices issue insurance coverage.
Investors often use life assurance products to settle an estate or as an additional “safe money” investment. They may use life assurance when the insured’s home mortgage indirectly relies upon life and income. The value of the assurance policy’s investment may correlate directly with the policy’s guaranteed benefit, the underwriter’s investment results, and the years the policy has remained in-force.
People often confuse life assurance and life insurance. This article compares differences and similarities between life assurance and life insurance policies, underwriters, and uses.
Differences of Life Assurance and Life Insurance
As with life insurance, a life assurance policy provides a guaranteed death benefit if the insured dies while the policy is active. In addition, the life assurance product may pay out yearly bonus amounts. Unlike a term life insurance, the life assurance policy may reward the insured with incremental revenues! If the insured is alive at the end of the policy pay-in period, the total return of the policy may increase. The policy provides both the death benefit and yearly bonus sums.
For these reasons, holders of life assurance products may sell a long-term policy to cash out benefits. Specialist life assurance brokers may offer to purchase these policies, usually at a discount from the guaranteed policy value.
How Investment Returns Affect Life Assurance
As with other secure money investments, portfolio managers at life assurance companies usually invest client premiums in guaranteed return investments, such as fixed income. Depending upon the investment policy of the life assurance concern’s management, the portfolio manager may invest in short to intermediate-term fixed income instruments.
When interest rates decline, the investment manager is likely to return lower bonus amounts to life assurance policyholders. Concerns about the sovereign bonds, or the bonds issued by governments at Standard & Poor’s AAA-credit levels, may also affect investment return rates on life assurance and other safe money portfolio instruments.
The purchase price of a life assurance policy depends upon market conditions from investment buyers.
Types of Life Assurance Policies
There are three basic kinds of life assurance:
- Term Life. The underwriter agrees to pay the insureds beneficiaries a death benefit during a certain term of coverage. For example, the insurance company agrees to pay a known benefit if the insured dies over a 10-year period. The insured makes premium payments during the term of coverage. If the insured dies during the term, beneficiaries of the policy receive the death benefit. If the insured dies after the term (after which time the insured ceases to pay premiums to the insurance company) the beneficiaries are unlikely to receive death benefits.
- Whole Life. The client pays a yearly premium to provide policy benefits after death of the insured. Premium payments must be made as agreed in order to derive the policys death benefit. Interruption of premium payments to the insurance company will void the underwriters agreement to pay the death benefit.
- Endowment Life. The client makes regular premium payments to the insurance company according to an agreed upon schedule and receives a lump sum on a known date. This kind of life assurance programme is funded by annual premiums over the pay-in period. If the insured cancels the endowment life assurance programme prior to the end of the pay-in period, cancellation fees or penalties may result.
Endowment life offers a key benefit for the insured. If the client dies prior to the end of the pay-in period and the endowment’s lump sum provision date, heirs receive some form of death benefit. The outstanding premiums owed to the underwriter are therefore waived.
However, the amount of money received by successors in this kind of scenario may vary. The underwriter’s administrators consider the length of the policy and their own investment performance to determine the premature payout.