In the world of finance, people might use the terms 'life insurance' and 'life assurance' like they mean the same thing. But they're different. Both give money when the person who has the policy dies, but the rules, what they cover, and why you get them are different.
What is Life Insurance?
Life insurance is a kind of agreement, or we can say a contract, between you and an insurance company. The insurance company is committed to giving a specific amount to your chosen people (beneficiaries) when you pass away. This is based on the regular premiums you made when you were alive.
Benefits of Life Insurance
- Financial Security: It acts as a financial safety net. If something happens to you, your loved ones receive financial support.
- Securing Your Child’s Future: It helps in saving money for significant events in your child's life, such as education.
- Risk Coverage: Life insurance shields against various types of risks. These include the death of the policyholder, disability of the policyholder due to an illness or accident making him unable to earn a living, or any critical illness such as stroke, cancer, etc.
- Tax Benefits: There are several tax advantages associated with life insurance. For example, premiums paid towards a life insurance policy qualify for a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act.
- Long-Term Savings: It can also serve as a means to save money for the future.
What is Life Assurance
Life assurance is a type of life insurance. It lasts for the whole life if you keep making monthly payments. It is also known as the ‘whole of life’ cover. Here are some key points about life assurance:
- Guaranteed Payout: Life assurance has a guaranteed payout. It will happen in the future, no matter when you pass away. This is different from life insurance. It only pays out if the policyholder dies during the policy term.
- Premiums: The premiums for life assurance are usually higher than for life insurance. This is because the coverage is for the entire lifetime of the policyholder.
- Investment Element: Some types of life assurance include an investment element. You pay money into your policy. It can be invested. So, the lump sum your family gets could grow over time.
- Tax Implications: The final payout to your loved ones isn’t taxed much. But, it might face a 40% inheritance tax.
- Financial Security: Life assurance can help ease the financial burden on your loved ones when you die. Some of the funds cover funeral costs.
Difference Between Life Insurance And Life Assurance
| Life Insurance | Life Assurance | |
| Definition | A contract that pays out a lump sum to your beneficiaries if you die during the term of the policy. | A contract that pays out a lump sum to your beneficiaries when you die, regardless of when that is. |
| Duration | Fixed term (e.g., 10, 20, or 30 years). | Lifetime. |
| Payout | Only if the policyholder dies during the policy term. | Guaranteed, as it covers the policyholder for their entire life. |
| Premiums | Generally lower, as the risk to the insurer is less. | Generally higher, as the insurer is bound to pay out eventually. |
| Investment Element | Typically, no. | Some policies may have an investment element. |
What to Choose: Life Insurance vs Whole Life Insurance
1. Life Insurance:
- Purpose: Ideal for covering specific debts, such as a mortgage, and providing financial support to dependents.
- Situation: If you have a mortgage or specific loan, the coverage amount can align with the debt and its duration.
- Considerations: You may choose a higher coverage amount for the living expenses of dependents or opt for a longer term if you have or plan to have children.
- Variations: Options like 'reducing' life insurance or family income benefits cater to different needs.
- Joint Life Insurance: It is cheaper if covering you and your partner, but note that it pays out only once.
2. Whole Life Assurance:
- Purpose: Typically, it has higher premiums and is not an alternative to term cover.
- Situation: Often chosen with inheritance tax in mind, paying out to cover the tax bill on an estate.
- Crucial Step: Both term insurance and whole life assurance should be "written in trust" to avoid inheritance tax on the payout.
- Comparison: Easily compare term insurance policies, but whole life assurance requires personalised advice due to its complexity in tax and inheritance planning.
- Recommendation: Consult an insurance broker or a life assurance company if considering whole life cover.
In summary, life insurance is suitable for covering specific debts and providing for dependents. In contrast, whole life assurance, with its higher premiums, is often chosen for estate planning, particularly to address inheritance tax. It's important to consider individual needs and consult professionals for personalized advice.
Conclusion
To sum up, choosing between Life Insurance and Life Assurance depends on what you need and your money goals. Term Insurance is great for dealing with specific debts and quickly helping out your family financially. It gives you options for how much coverage you want and how long it lasts. On the flip side, Whole Life Assurance, though more expensive, is often used for planning for taxes when you pass away and thinking about your estate in the long run.