Life Insurance and Life Assurance are not the same!

We all know what life insurance is, right? It’s the ten thousand dollar policy that grannies sell at the grocery store, and it’s meant to provide for your family after you’re gone. Your kids get the cash to pay for college and your spouse gets enough money to live on for a few years. Knowing this, we should also know what life assurance is, right? It's that policy with a million dollar payout that has 25% of its premiums going towards church or charity or something like that. But wait! Life assurance isn't really insurance—at least not in the way we usually think about it—since it doesn't insure you against death.

So what is life insurance, then? Life insurance is the savings plan that guarantees your kid's college tuition, and it's your lump sum payout for those long divorce court proceedings. Or, in other words—and this is the breakdown I've heard from friends since I first started my career—life insurance is meant to provide for your future and protect you from financial hardship.

Unfortunately, these are two very different things. Just as different as calling a lump sum payout “a ridiculous amount of money for a month of work” versus calling it “the one year’s worth of salary that would allow you to live comfortably and not have to worry about any bills until all debts are paid off.”

Life assurance isn't wrong. It's just not the same thing as life insurance. And it’s just as important in its own way, because it provides a lump sum payout at the end of your life in exchange for a smaller amount that you pay every month or every year to keep the policy in force. The main thing that makes life assurance different from traditional life insurance is that it provides a lump sum payout (a year's worth of salary, for example) while traditional life policies provide a monthly benefit (like $100/month), and there are many other differences as well. But for now I'd like to concentrate on the main difference between these two products.

This is a huge misconception that’s very easy to make, especially if you don’t look into what life assurance and life insurance really are. I read somewhere recently that life insurance has become the last type of “old school” insurance that people still buy, mostly because life assurance is not well understood. Most people think it’s something grannies sell at the grocery store to pay their kids college tuition when they die (which is what traditional life insurance provides), but they’re more likely to be confused by the fact that many policies provide a lump sum payout if you die before the policy expires (which is something traditional life policies don't provide). I can see why this confusion would arise. Both products provide a monthly benefit that will keep your family together without having to worry about money for a while, and both are guaranteed death benefits. But there is one big difference, which is that life assurance provides a lump sum payout when you die, while traditional life insurance plans don't.

Some people think that life assurance plans are similar to term policies because the only difference between them is what happens if you die before the policy expires (i.e., there's a large payment at the end of the term). But this is just not true. You can actually lose your whole premium if you die before the policy expires, and there's nothing anyone can do about it. Life assurance plans are like term plans in some ways—for example, there are still a lot of products out there that charge you a pretty large death benefit if you're unlucky enough to die before your plan expires—but they're very different things from a financial perspective.

Oh, and by the way? We’re not talking here about life insurance that has a cash value for members to put into a living trust or other investments (i.e., whole life insurance). Don’t get confused by this terminology—life assurance is something vastly different from whole life insurance.

Life assurance is one of those products that I wish the industry could pressure people to understand, because it's vastly different from what most people think it is. It's also one of those products that I'm sure some people would be more interested in if only they understood how it really works. More importantly, life assurance is something they should be aware of when considering their financial future options. We're living in a world where we need to ensure that our family will be taken care of comfortably after we're gone, and even if you don't have kids and a family, your spouse definitely will.

Anyway, I hope this clears up any confusion there may have been. Life assurance and life insurance are two different things, and it's very important to know the difference.

Kris Holetz is the founder of www.canadianfinancialguide.com , an online resource that helps explain financial products to Canadians so they can make better decisions about their money. He has previously worked in the insurance industry for some of Canada’s largest financial institutions and has been featured on CBC News Online, Global TV and The Globe and Mail as an expert in his field. Feel free to follow him on Twitter at @canadianfinancialg.

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Life Insurance and Life Assurance are not the same!

Life Insurance and Life Assurance are not the same!

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