Insurance is an integral part of personal finance. Owning an insurance policy helps people feel secure and confident, besides easing monetary pressure during unfortunate events.
Insurance policies are of different kinds offering unique features and life insurance policy is a popular one. A variation to this is the life assurance policy, which is commonly used as a synonym for insurance. However, life insurance and life assurance differ entirely in their features. Today’s article aims to explore the differences between insurance and assurance policies.
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What is a life insurance policy?
A life insurance policy is a contract between the policyholder and the insurance company to compensate the holder’s family in the case of the holder’s death within a specified term.
Upon subscribing to a policy, holders pay periodic premiums to the insurance company. A proportionate sum is paid in a lump sum if and during the holder’s demise, if the policy is still active.
It is essential here to note that the policy can only be claimed if the holder dies within the duration of the policy. The holder’s death after the policy’s expiry is not eligible for any insurance claim. The insurance policy is lapsed and invalid from the date of expiry.
What is the concept of life assurance?
Conceptually, life assurance is similar to insurance, too.
It is also a contract between the assurance company and the policyholder to compensate the family monetarily after the holder’s death. Here, too, the holder is obligated to pay premiums at regular intervals to be eligible for the final claim. The difference, however, is about the time of death.
While an insurance policy is eligible only if the holder dies within a specific term, the assurance policy is eligible if the holder dies at any time.
As the term suggests, the policy assures holders about the compensation for the rest of their lives. So, irrespective of the time of death, the policy remains valid and can be claimed by the holder’s family.
Why should you have a life cover?
- The primary reason to have an insurance or assurance policy is to protect your family from financial burden after your demise. Such policies come in handy to clear existing loans or to take care of children’s future, marriage, etc.
- Paying for insurance is effective in promoting the practice of saving.
- Insurance plans with investment components help in wealth generation.
- Having a life insurance policy brings a sense of security and peace to the holder, as well as the family.
- Insurance plans offer policyholders the benefit of saving tax. Both premium and final payouts are eligible for benefits under the Income Tax Act.
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Life assurance vs insurance
| Life insurance | Life assurance |
| The policy exists for a fixed term. | The policy is valid until the life of the holder. |
| Nominees are eligible for insurance claims only if the holder dies within the agreed term of the policy. | Nominees can claim insurance whenever the holder dies because these policies cover the holder’s whole life. |
| Premiums are lesser since the term is limited. | Premiums are comparatively higher since the policy is active for the rest of the holder’s life. |
Which policy should you choose?
The choice between life insurance and life assurance must purely depend on the individual’s preference and the current position in life.
For an individual who wants to secure the family with respect to specific commitments such as clearing a loan or saving for their child’s future, a life insurance policy may be better. However, a life assurance policy may suit better for an individual who wants to secure the family, in general, and ensure their comfortable living at all times, irrespective of financial commitments.
It is also important for policyholders to consider their potential to pay premiums while subscribing to a policy. A high amount of periodic premium might be difficult for those who do not earn sufficiently, or have multiple other commitments. In such cases, life insurance may be more reasonable since premiums are lower.
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Bottomline
The importance of holding a life insurance policy cannot be stressed enough. A solid financial plan is one that has insurance as one of its components. Having a life cover can help your family navigate through a crisis. Hence, holding a life cover in some capacity is paramount.
Life insurance firms offer policies with varying terms to their customers. Insurance and assurance are two such policies with different benefits. Understanding their functioning and making an informed choice between the two is a critical step before buying a policy.
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