What Is Assurance?

Just when you think you're coming to terms with the financial world, you stumble across a new term: assurance. What is Assurance? And Is this something you need? Don't worry, in this insight, we will explain what assurance is, who it is suitable for, and whether you need to consider putting some assurance in place.

Key Takeaways

• Assurance is a type of insurance policy that guarantees a payout for a specific event, such as death. It provides financial security for the insured and their loved ones.
• Whole of life assurance, or life assurance, offers lifelong coverage and a guaranteed payout upon death. It can be used to cover funeral expenses, repay debts, or address inheritance tax liabilities.
• Term life insurance may be a better alternative for some, offering coverage for a specific period at a lower cost.
• Whole of life assurance is often chosen later in life, for smaller benefit amounts used for funeral costs or repaying small debts. It can also be used for inheritance tax planning through strategies like "gift inter vivos."

What Is Assurance?

Assurance is a type of insurance policy that pays out when a specific event, like death, is guaranteed to happen at some point. It ensures that there will be financial support for that event, providing peace of mind and protection for the insured and their loved ones. So, what is Assurance? In simple terms, it's a financial safety net that pays out when a specific event occurs, such as death.

Although the term assurance is often interchangeably used with insurance, it should refer to insurance policies that guarantee a payout. Assurance is also a term used within accountancy, specifically auditing. 

What Does Assurance Mean?

The term Assurance means a promise or guarantee that something will happen or be provided. To be Assured, means you are confident of a certain outcome. In Insurance, it is used as an alternative to insurance when a guaranteed payout is agreed.

What is the Difference Between Insurance and Assurance?

Insurance is like a safety net that protects you for a limited time if something unexpected happens. It covers events that might occur, such as accidents or damages, during a specific period. For example, if your car gets damaged in an accident while you have car insurance, the insurance company will help cover the repair costs.

On the other hand, assurance is more like a long-term commitment. It provides continuous coverage for events that are certain to happen eventually, like death. With assurance, you pay regular premiums to an assurance provider, and they promise to pay a predetermined sum of money to your beneficiaries when you pass away.

The key difference is that insurance protects against uncertain events within a specific timeframe, while assurance provides ongoing coverage for events that are guaranteed to happen.

Assurance in Life Insurance

Life assurance, also known as whole of life insurance, guarantees a payment to your loved ones when you pass away. The money can be used for things like funeral expenses, paying off debts, or inheritance taxes. Whole of life insurance lasts your whole life and can be written in a Trust to avoid extra taxes. When comparing it to term life insurance, think about your needs and budget. Whole of life insurance is for your entire life but costs more, while term life insurance is for a specific time and costs less.

How Does Life Assurance Work?

Life assurance, or whole of life insurance, works in the following way:

Purchase

You buy a life assurance policy from an insurance company by paying regular premiums. The premiums are typically paid monthly or annually. The policy provides coverage for your entire life, as long as you continue paying the premiums. There is no specific term or expiration date like with term life insurance.

Death Benefit

When you pass away, the insurance company pays out a predetermined sum of money, known as the death benefit, to the beneficiaries you have named in the policy. This payout is usually in the form of a lump sum, although some policies may offer installment options.

Use of Funds

The beneficiaries can use the death benefit funds for various purposes, such as covering funeral expenses, settling outstanding debts, providing financial security for family members, or addressing inheritance tax liabilities.

Premiums and Cost

Premiums for life assurance are typically higher compared to term life insurance. The cost depends on factors such as your age, health condition, lifestyle, and the coverage amount you choose. The premiums are usually fixed, but some policies may have premium increases over time.

Cash Value (Optional)

Some whole of life insurance policies may have a cash value component. A portion of your premiums is allocated towards building cash value, which grows over time. You may have the option to access this cash value during your lifetime through policy loans or withdrawals, but it reduces the death benefit.

Trust (Optional)

You can write your life assurance policy into a Trust. This helps to ensure that the death benefit is not included in your estate for inheritance tax purposes, providing potential tax advantages for your beneficiaries.

Overall, life assurance offers lifelong coverage and a guaranteed payout to your beneficiaries upon your death, as long as you continue paying the premiums. It provides financial protection and helps secure your loved ones' financial well-being in the future.

What are the Benefits of Assurance?

Assurance policies give you money when something specific happens. This gives you peace of mind and helps you and your loved ones financially. It's like a guarantee that if that certain thing happens, you'll get the money you need.

The intended payout can be used in different ways:

Helping Loved Ones

Life assurance gives money to your family or dependents when you die. It helps them pay bills, mortgage, education, and other important expenses.

Planning for the Future

Life assurance is part of making plans for when you're gone. It ensures that money is available to cover taxes, debts, or other costs, so your loved ones receive what you intended to leave them.

Business Support

Life assurance can keep a business running if a key person passes away. It provides money to cover expenses, repay debts, or make a smooth transition.

Saving and Investment

Some types of life assurance let you save money over time. It grows in value and can be used for future needs while still providing a payout to your loved ones if something happens to you.

Giving to Charity

You can use life assurance to support a charity you care about. When you pass away, the money goes to the charity as a donation.

In simple terms, life assurance gives money to your family or others, helps with planning, supports businesses, helps you save, and can be used for charitable giving.

Who is Life Assurance Suitable For?

People typically choose to take out a whole of life assurance policy later in life. It's often for a smaller benefit amount used for funeral costs or repaying small debts. Because it guarantees a payout, it can be expensive. This is why fewer people opt for whole of life assurance until they are older and no longer eligible for term life insurance, which offers a cheaper policy with a higher benefit amount. Term life insurance is only available for a set number of years, and if the policyholder doesn't pass away during that time, there will be no payout.

Whole of life assurance is often used to plan for inheritance taxes. One strategy called "gift inter vivos" involves making a gift before death. Whole of life assurance policies are used to cover the taxes that might be owed on the gift. This helps protect the money you want to leave behind for your loved ones.

Do You Need Life Assurance?

Assurance may or may not be needed based on your situation. If you have people depending on you, it can offer financial security. It's also helpful for handling debts or planning your estate. However, depending on your age and needs, term life insurance might be a better option. It's important to consider your situation and seek advice from a professional to make the right choice.

Protection Assurance vs Accounting Assurance

Assurance in the insurance world is different from accounting and audit assurance. In auditing, assurance means checking if financial statements are accurate and follow accounting rules. An assurance company can be a life insurance company or an auditing firm. They help businesses by confirming the information is correct and reliable.

Wrapping Up: What is Assurance?

Assurance, whether in the context of financial protection or professional services, provides certainty and peace of mind. It shields individuals and businesses from the financial impact of life's inevitable events and validates a company's financial information, enhancing its credibility amongst stakeholders.

Assurance isn't just a financial concept—it's a commitment to providing security, peace of mind, and trust.

Whether you're considering life assurance to protect your loved ones or seeking assurance services to enhance your business's credibility, understanding the term "assurance" is the first step towards making informed decisions. Hopefully, this detailed guide has helped clarify the question: "what is Assurance?"