The two companies said the merger, expected to take place in September, would lead to cost savings benefiting shareholders and policyholders. The new organisation will be called United Assurance.
In a separate move, more than a million Refuge policyholders will share in a pounds 101m windfall, paid because of the strength of the insurer's long- term business funds. The bonuses will be added to their value of their policies. Refuge said a 20-year endowment taken out in 1981, with a sum assured of pounds 8,000, would be allocated an extra pounds 763.
A further pounds 430m surplus, known as "orphan assets", has been identified as attributable to the company's shareholders. However, Refuge stressed the money would not be paid out immediately but would be used to finance group activities.
The merger highlights the long-running contractions being suffered by the UK insurance industry, hit by rising costs and over-supply in an increasingly competitive market.
Both United Friendly and Refuge operate in the same area of the market, servicing mainly low-income clients, whose premiums are often collected at their homes each month. United and Refuge sell mainly life assurance, but United has a general insurance arm providing building, contents and household products. It quit the British motor market in May.
The combined organisation will have some 2.8 million clients, with pounds 6.5bn under management.
George Mack, the new chief executive in the merged organisation, said: "We intend this merger to obtain significant economies of scale."
Some 100 offices will close, while United's head office in south London will transfer to Refuge's headquarters in Wilmslow, Cheshire.
Mr Mack said that no decisions had been made on which staff would go.
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