What's the difference between assurance and insurance?

Quite often you will find people talking or writing about life insurance when what they actually mean is life assurance. Although many journalists, and even product providers now use the terms assurance and insurance almost interchangeably there is a difference between the two. Assurance means you are insuring for an event that will definitely happen one day — death or retirement. Insurance covers events that may happen but, equally, may not happen, such as illness, accident, etc.

What is life assurance?

Perhaps it should really be called death assurance! When you buy life assurance, you are simply arranging for a sum of money to be paid out on your death. Of course, the assurance industry makes it a lot more complicated than that. Policies may pay a lump sum, or a regular series of smaller sums; payout may be guaranteed or may be on offer for only a limited period of time; both premium and payout may be fixed or may vary.

Life assurance can be divided into two basic types — policies that offer protection only and those which have an investment link. Protection-only policies (usually described as term assurance) pay out if you die within a specified period but otherwise pay nothing. This is usually the cheapest way to provide financial protection for your family in the event of your dying. In effect, "term" policies are a bet — you are betting that you are going to die and the insurance company is betting that you aren't!

Investment-linked life assurance includes 'endowment policies' and 'whole of life policies'. As well as paying out on death, these build up an investment value that may be cashed in during your lifetime. Many types of pension scheme, such as personal pensions (including stakeholder schemes), also count as investment-type life assurance. Providers of life assurance policies must be authorised by the Financial Services Authority (FSA).

Whole of Life .
A whole of life policy will pay out on the death of the life assured whenever death occurs, provided that the policy is still in force. Premiums are payable either throughout life or until the life assured reaches a certain age (stipulated in the policy 75 is common) when premiums cease but life cover continues. Unlike term policies, because a whole of life policy has an investment element, it will, over time, also have a surrender value.

As payment of the benefit is inevitable each premium is made up of a mortality element and a savings element, the latter to build up an investment fund to pay out the benefit on death. This has two consequences:

• Whole of life policies tend to be more expensive than term assurance for the same level of cover
• Whole of life policies possibly carry cash values on early surrenders dependent on the type of policy, number of years in force and the company's investment performance. It is unlikely, however, that there would be any surrender value in the early years of the policy