Life Insurance or Life Assurance is an insurance policy which pays out a cash lump sum in the event of the death of an individual during the policy term who is insured by the insurance policy. The insured individual is known as ‘the life assured’.

Insurance is provided by the life company in return for the payment of a regular insurance premium. That is the basic premise of life insurance cover.

Did you know that there is a subtle difference between Life Insurance and Life Assurance? Although the terms are oftentimes used interchangeably, Life Insurance refers to protection that is provided over a specified period of time (i.e. temporary assurance) whereas Life Assurance refers to protection that is provided until death (i.e. whole of life assurance). 

For the purposes of this article, the term will be used interchangeably and can be assumed to mean the financial product as a whole unless otherwise stated.

Life Insurance pays a lump sum to your dependents following your death

Should You Get Life Assurance?

Life assurance cover, like nearly all other financial products, isn’t for everyone. There are some people who may never need life assurance cover

Why? Because their personal circumstances don’t necessitate it. A study by the Society of Actuaries Research Institute (SOA Research) found that 63% of respondents had life assurance cover as compared to 98% for automobile insurance. That is the difference between insurance that is bought out of choice and insurance that is bought out of necessity.

Think about it logically, you don’t take out life assurance cover for the benefit of yourself, you take it out for your dependents. If you die during the insured period, it’s not like you’ll be the one who’ll get to enjoy the money! 

So, clearly, for those who have no dependents and/or for those who previously had dependents who are now self-sufficient, there is a reduced or perhaps negligible need to have life assurance cover. The same goes for those who have ample financial resources to supplement the loss of income of their dependents in the event of their untimely death. 

With that being said, there are many circumstances which may necessitate life assurance cover. 

A key point to understand is that your personal need for life assurance cover will vary over the course of your life. 

When you’re in your early twenties with little to no responsibilities, your need for life assurance cover will likely be low. 

Likewise, as you approach retirement, depending on your relationship status, dependents and the financial wellbeing of both yourself and those around you, your need for life assurance cover could very well be low once more. 

It’s typically when significant life changes occur that the need for life assurance cover increases: having children, buying your first or subsequent home and/or changing jobs. 

These life changes may expose both you and your family to financial vulnerability should an untimely death and a subsequent loss of income be experienced. This is when life assurance cover is needed most.

Pros and Cons of Life Assurance

There are a number of pros and cons associated with life assurance policies.

Pros of life assurance

  • They allow you to fund the loss of income that would be experienced by your dependents in the event of your death
  • They allow you to pay off secured loans such as a mortgage so that your dependents can enjoy the use of an unencumbered property in the event of your death
  • They allow you to cover the inheritance tax liabilities of your dependents in the event of your death
  • They allow you to provide an inheritance for your dependents in the event of your death

Cons of life assurance

  • In order to secure the best premium, you may have to take out cover when you’re in good health and aren’t at immediate risk of death. However, it may be cheaper to buy life assurance cover 15 years too early than fifteen minutes too late!
  • Your eventual death may fall under an exclusion clause which may result in no benefit becoming payable by the life company
  • You must ensure that all relevant information is appropriately disclosed to the life company as so to ensure that there is no grounds for them to clear themselves of liability

There are two main types of life assurance policies: temporary assurance policies and whole of life assurance policies. Understanding the differences between the two is fundamentally important.

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Temporary Assurance Policies

Under a temporary assurance policy, life assurance cover is provided for a fixed and specified period of time, commonly referred to as the ‘policy term’. 

This cover is provided by the life company in return for the payment of a fixed insurance premium which is paid on a recurring basis over the course of the policy term. 

Once the policy term lapses, provided the life assured is still alive, the life assurance cover will cease and there will be no cash payment made. Therefore, temporary assurance policies are designed for those who wish for insurance protection in the event of their death during a specified period of time.

There are four main types of temporary assurance policies:

  • Term assurance
  • Convertible term assurance
  • Pension term assurance
  • Mortgage protection
Temporary assurance policies

Term Assurance

Under a term assurance policy, the life company (i.e. Zurich, Irish Life, Aviva etc.) contracts to pay out a lump sum in the event of the death of the life assured during the policy term. 

In return, the life company receives a regular payment of insurance premium. The policy term can vary from as little as one year to as much as 50 years depending on the life company in question. 

Note that most life companies do have an upper age limit for term assurance cover, say, 85 years of age. 

Once the upper age limit is reached, or at the end of the policy term, whichever is earlier, cover under the term assurance policy will cease.

The insurance premium of a term assurance policy is fixed from the outset and the premium itself will vary from individual to individual based on factors such as:

  • The age of the life assured
  • The length of the policy term
  • The amount of cover
  • The health and smoking status of the life assured
  • The occupation of the life assured
  • Any optional or ancillary benefits that are required by the life assured

Certain life companies may have a minimum premium that they will charge for term assurance policies and other insurance products irrespective of the facts and circumstances pertaining to the individual in question. 

A term assurance policy can be structured as either:

Joint life cover

With joint life cover, there are two lives assured under the term assurance policy and a lump sum will be paid out upon the death of the first of the two lives assured during the policy term. This payment will be made to the surviving life assured after which point the cover will cease.

Joint life insurance is a type of personal insurance which covers two policyholders

Dual life cover

With dual life cover, again there are two lives assured under the term assurance policy, however in this instance a lump sum is paid out upon the death of each of the two lives assured during the policy term.

Dual Cover life Insurance Ireland

Assuming there isn’t a highly material difference between the premiums of a joint life and dual life policy, all else being equal, dual life policies are typically considered to be superior given the fact that they can provide twice the amount of cover.

The issue with term assurance policies as a whole is that at the expiration of the policy term, if the life assured wishes to extend their coverage, they will need to reapply to the life company for a new policy.

Why is this a problem?

Well, the health status of the life assured may have deteriorated during the previous policy term and they will inevitably have gotten older and may have experienced other changes in their life circumstances as well i.e. a new occupation. 

As a result, extending coverage via a new term assurance policy will almost always come at a higher insurance premium and that’s if it’s even possible to take out a new policy in the first place. That’s where convertible term assurance comes in.

Convertible Term Assurance

With convertible term assurance, the term assurance policy comes with a conversion option (in return for a higher premium) whereby the life assured has the option, but not the obligation, to convert their existing term assurance policy into a new policy with a longer policy term irrespective of their health status on the date that the conversion option is exercised

In other words, if and when the conversion option is exercised, the premium payable on the new term assurance policy will be based on several factors (such as level of cover and age) but the health status of the life assured will not be one of those factors

If the conversion option is not exercised at the end of the policy term, or before the upper age limit for the conversion option itself, then the option will expire. If the conversion option is exercised, then the term assurance policy will typically convert into either a new term assurance policy without a conversion option or a whole of life policy.

Convertible Term Assurance

Pension Term Assurance

Pension term assurance is a term assurance policy which is typically taken out by those who are self-employed and those in non-pensionable employment (i.e. those who do not have access to an occupational pension scheme which provides death in service benefits). 

The purpose of the policy is to provide a lump sum cash payment in the event of the death of the life assured before retirement. 

Under a pension term assurance policy, the premium paid by the life assured qualifies for income tax relief at the individual’s marginal rate of taxation (subject to Revenue limits). 

A pension term assurance policy is also commonly referred to as a Section 785 policy owing to the relevant section of the Taxes Consolidation Act 1997 which grants tax relief on the premiums. A pension term assurance policy must be taken out before the life assured attains the age of 70 and coverage under the policy automatically ceases at age 75. 

Pension Term Assurance

Mortgage Protection

Now let’s take a look at decreasing term assurance policies. The most classic example of such a policy is a mortgage protection policy. Mortgage protection is a type of term assurance policy which, like regular term assurance policies, pays out a cash lump sum upon the death of the life assured within the policy term. 

The added caveat being that the cash lump sum paid out is an amount which is estimated to be sufficient to pay off the mortgage balance of the life assured. Idea being that the life assured’s dependents will own the bequeathed property in full upon death without having to deal with the outstanding mortgage. 

Understanding mortgage protection is crucially important for current and prospective homeowners and you can learn more about mortgage protection insurance by checking out our dedicated page here.

Mortgage Protection Insurance Quotes

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Whole of Life Assurance Policies

Whole of Life assurance policies differ from temporary assurance policies in two main ways:

  • Cover doesn’t automatically cease at the end of a specified period of time
  • Terminating the policy may result in the payment of an encashment value

There are two main types of Whole of Life assurance policies:

  • Guaranteed Whole of Life assurance
  • Unit-linked Whole of Life assurance
Whole life insurance is guaranteed to pay out a lump sum on the death of the policyholder

Both of these types of policies can be structured to cover one or two lives. 

One life would be covered using a single life policy whereas two lives would be covered using either a joint life first death or a joint life last survivor policy.

A Section 72 policy is a classic example of a joint life last survivor policy which is used for the purposes of covering an inheritance tax liability for beneficiaries.

Its name is owed to the relevant section of the Capital Acquisitions Tax Consolidation Act 2003 which permits such a policy to be used for the purposes of covering an inheritance tax liability.

Guaranteed Whole of Life Assurance

Under a Guaranteed Whole of Life assurance policy, the life company is guaranteeing the payment of a fixed cash lump sum upon the death of the life assured in return for a fixed premium which is payable throughout life. 

Such policies typically don’t provide for an encashment value upon termination. 

However, one may opt to receive an encashment value after a specified period of time in return for a higher premium. 

Should an encashment value exist and the life assured no longer wishes to continue to pay the insurance premiums he/she could either:

  • Terminate the policy and take the encashment value

OR

  • Leave the policy in place with no premium at a reduced level of cover which will become payable upon death. This is known as a paid-up policy

Unit-Linked (Reviewable) Whole of Life Assurance

Under a Unit-Linked (Reviewable) Whole of Life assurance policy, the encashment value is linked to the value of units in a unit fund (i.e. an investment fund). 

The insurance premiums paid by the life assured to the life company are used to purchase units in a unit fund at the unit price on the day that the premium is received. 

The unit price itself will fluctuate in line with the value of the fund’s underlying investments and the net asset value (NAV) of the fund. 

Therefore, at any given point in time, the encashment value of the life assured’s unit-linked policy can be said to equal:

  • Number of units held by the policy x Unit price

Unlike a Guaranteed Whole of Life assurance policy, a Unit-Linked (Reviewable) Whole of Life assurance policy does not guarantee to provide a fixed level of cover for life in return for a fixed insurance premium

Both the insurance premium and the level of cover are subject to change and a situation can arise where a higher premium is required from the life assured to maintain a consistent level of coverage. 

The life company may very well, at the outset, quote an estimation of the premium that will be required to maintain a particular level of coverage throughout life, but this is not guaranteed to be the actual cost

Why? Because the premium estimation at the outset is based on a series of assumptions, namely:

  • The investment return of the fund linked to the policy
  • The life assured’s capacity and willingness to pay all premiums
  • The life assured’s capacity and willingness to not take an encashment value
  • Future administrative costs and charges for the life company

Like with all assumptions, especially those which span multiple decades, they are prone to error. 

Take the assumption around future investment returns. Nobody can predict with certainty how the financial markets are going to perform in the future. 

So it’s quite likely that the initial estimation will be incorrect – no matter how sophisticated the estimation method may be. 

The implication for unit-linked policies and their policyholders is that the initial assumptions will dictate the initial premium:

  • The higher the assumed investment return, the lower the projected insurance premium will be. While beneficial in the short-term, this increases the likelihood that an increase in premium will be required in the future
  • The lower the assumed investment return, the higher the projected insurance premium will be. While disadvantageous in the short-term, this decreases the likelihood that an increase in premium will be required in the future

Due to the way that these policies operate in the background, it’s possible that the policy may bomb-out whereby the encashment value falls to zero. Where there is a risk of bomb-out, or even where the encashment value suffers a significant decline, the life company will typically require:

  • An increase in insurance premium

OR

  • A reduction in cover

OR

  • A combination of both

While a unit-linked whole of life assurance policy may be cheaper than a guaranteed whole of life assurance policy at the outset, it’s important to be aware that the premium on the former could increase substantially should the assets of the investment fund underperform.

Should an encashment value exist and the life assured no longer wishes to pay the insurance premiums he/she could either:

  • Terminate the policy and take the encashment value

OR

  • Leave the policy in place for a temporary period of time until bomb out is reached at which point the policy will be terminated

Upon the death of the life assured, under a Unit-Linked (Reviewable) Whole of Life assurance policy, the sum payable is the greater of:

  • The cover

OR

  • The encashment value

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Ancillary Benefits

In the case of both temporary assurance and whole of life assurance policies, it’s likely that there will be options for additional or ancillary benefits that can be added to the policy. 

Many of these benefits are offered in return for a higher insurance premium. The idea behind these benefits is to add additional flexibility to the policy for the life assured. 

However, this flexibility tends to come at a cost and we know that securing life assurance cover which is affordable is a top priority for consumers. 

A study by the Society of Actuaries Research Institute (SOA Research) found that the cost of the insurance policy is the number one most important feature to consumers when purchasing insurance. Purchasing the most economical and sensible life assurance policy at the right time should be a top priority for anyone looking for life assurance. Therefore, you should take care when opting to include any ancillary benefits onto your policy.

Indexation Option

With an indexation option, the life assured’s cover will increase each year, irrespective of their health status, along with the insurance premium.

The value of an indexation option is that it provides a degree of protection against inflation and helps the policyholder to maintain the real value of their cover over time. 

Given that the prices of goods and services in the economy have a tendency to increase year-over-year, €100,000 worth of cover today is not going to purchase €100,000 worth of goods and services for your dependents in 10 years time or whenever you happen to pass away.

According to the European Central Bank, the definition of price stability within the Euro Area is a medium term annual inflation rate of 2%. Therefore, we can assume that average annual inflation will equal 2% over the medium term (because the European Central Bank will utilise the monetary tools at their disposal to try and make it so). 

Assuming we have a life assurance policy that offers €100,000 worth of cover, in 10 years time, that cover will be worth just €82,035 in today’s terms if we assume an annual inflation rate of 2%. In other words, the purchasing power of the cover in 10 years time will be lower than its current value today. 

Data from the Central Statistics Office shines a light on Irish inflation more specifically. This is the rate of inflation that will be most important for those considering an indexation option on their life assurance cover in Ireland.

Time Period Yearly Inflation Rate
January 2023 7.8%
January 2022 5.0%
January 2021 -0.2%
January 2020 1.3%
January 2019 0.7%
January 2018 0.2%
January 2017 0.3%
January 2016 0.1%
January 2015 -0.6%
January 2014 0.2%
January 2013 1.2%

Guaranteed Insurability (Life Events) Option

With a guaranteed insurability option, the life assured will be able to increase their cover, irrespective of their health status, upon the happening of a life event that would typically necessitate an increase in cover such as childbirth, marriage or moving house. 

This option is usually subject to limits both in terms of the increase in cover on the happening of a particular life event and the total increase in cover from life events over the term of the policy.

Furthermore, there will typically be an upper age limit after which point the guaranteed insurability option will no longer be available.

Other ancillary benefits that may be available under a life assurance policy include:

  • Serious illness cover
  • Terminal illness cover
  • Children’s life assurance cover
  • Hospital cash cover
  • Accident cash cover
  • Waiver of premium
  • Accidental death cover

Temporary Assurance vs Whole of Life Assurance

There are pros and cons associated with both temporary assurance policies and whole of life assurance policies:

Temporary Assurance: Pros & Cons

Pros of Temporary Assurance

  • Temporary assurance policies can be easily compared, especially when utilising our 90-second online assessment tool to get the best quotes on the market. This makes identifying the most suitable policy for you a much more manageable task
  • Temporary assurance policies are economical as you can select a desired level of cover for a specified period of time
  • Temporary assurance policies can avail of conversion options to secure economical cover today with a view to extend cover in the future if so desired
  • Temporary assurance policies come with a guaranteed level of cover and insurance premium for the duration of the policy term

Cons of temporary assurance

  • Without an indexation option, the real value of a temporary assurance policy will be eroded over time due to inflation
  • In the case of mortgage protection, should interest rates be higher than anticipated, the amount of cover may be insufficient to cover the outstanding mortgage upon death. You can find out why by checking out our dedicated page on mortgage protection here.

  • Without a conversion option, the life assured may find it costly if not impossible to find replacement cover at the end of the temporary assurance policy term if their health has deteriorated

Guaranteed Whole of Life Assurance: Pros & Cons

Pros of Guaranteed Whole of Life Assurance

  • Insurance premium is fixed for the duration of the policy
  • Guaranteed policies may come with a small encashment value upon termination of the policy
  • Insurance cover is guaranteed to apply throughout life provided all premiums are paid

Cons of Guaranteed Whole of Life Assurance

  • Without an indexation option, the real value of a guaranteed whole of life assurance policy will be eroded over time due to inflation

Unit-Linked (Reviewable) Whole of Life Assurance: Pros & Cons

Pros of Unit-Linked (Reviewable) Whole of Life Assurance

  • Typically cheaper than guaranteed whole of life assurance policies at the outset
  • Reviewable policies may come with a small encashment value upon termination of the policy

Cons of Unit-Linked (Reviewable) Whole of Life Assurance

  • Both the level of cover and the premium at which that cover is provided are subject to review
  • The insurance premium may have to increase substantially in order to provide the same desired level of cover over time

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