Insurance and assurance are the two terms that are widely used in the financial market. People are often confused between these two terms and use them interchangeably as both the terms are associated with financial product that protects their interest. However, there exists a subtle and thin line of difference between insurance and assurance. In this article, let’s learn the key difference between insurance and assurance in order to make an informed purchase.
What is an insurance?
Insurance is a contractual agreement in which the insurance company indemnifies to compensate for the damage caused or losses suffered by the insured due to man-made/natural calamities or any other uncertain event, for consideration (premium). For example, term insurance policy promises to pay a certain sum of money in case the policyholder dies during the specific term (policy period). In case, policyholder survives the policy term, the insurance contract will become void and the insurance company is not obligated to pay any amount to the policyholder. In this, there is uncertainty surrounding the happening of the insured event. All the general insurance plans are insurance policies that provide protection against an anticipated event. For example, health insurance, fire insurance, marine insurance and motor insurance etc
What is the assurance?
Assurance refers to an agreement wherein the insurance company assures to provide remuneration for an event that is certain to happen, such as death. Assurance policy provides persistent coverage till the death of the policyholder. For example, a whole life insurance policy which provides financial coverage as long as the policyholder is alive. In this, the insured event will certainly happen, sooner or later. Except for term insurance, most of the life insurance products that come with investment component are assurance policies.
Key difference between insurance and assurance
Let’s compare both the terms – insurance and assurance on various parameters and understand the difference between insurance and assurance
|Basis for comparison
|Insurance provides protection against uncertain events such as fire, theft, accidents and flood etc
|Assurance provides financial coverage for events, whose happening is certain such as death
|Insurance helps to reinstate the financial position and achieve financial stability during an unforeseen event
|Assurance pays out the assured sum when the event takes place
|Insurance is based on principle of indemnity
|Assurance is based on the principle of certainty
|General insurance products such as fire insurance, marine insurance, motor insurance, health insurance and liability insurance etc
|Life insurance (except term insurance) such whole life assurance, annuity plans, endowment plans etc
|Compensation or the benefit under the policy is paid only on happening of an uncertain event
|Compensation or the benefit under the policy is payable on occurrence of an insured event or on maturity of the policy
|Generally for general insurance plans are of short duration which can be renewed year after year. Insurance plans with specific time duration such as term insurance which comes with a tenure
|Long-term contracts runs through the entire life of insured
|Coverage is provided against various risks that may lead to an unforeseen situation
|Coverage is provided against the definite event
|In insurance, policyholder pays the premium periodically to avail protection against insured risk
|In assurance, policyholder pays the premium periodically to receive the benefits on the happening of an event
Insurance vs Assurance
Insurance documents comes with the ‘terms and conditions’ that defines the type of losses or damages covered by the policy along with mentioning the maximum compensation that is payable by the insurance company in an uncertain or unforeseen event. Basically, in insurance contract, insured transfers the risk to the insurance company by paying premium. In return, the insurance company manages the risk by compensating the policyholder or the designated beneficiary on the occurrence of an unforeseen event or for the financial loss caused due to insured risk.
Assurance plans are life insurance plans that come with savings element attached where benefits are certainly paid by the insurance company in return for the premiums paid. Compensation will be either paid on maturity of the policy to the policyholder or on the demise of the policyholder to the beneficiary (family members) as designated by the policyholder.
To sum up, though insurance and assurance go hand in hand, services offered by each of the product is different. Understanding the simple difference between insurance and assurance will help you better understand every product offered by insurance and financial services industry. Insurance companies offer both insurance and assurance products. You need to buy the right plan keeping in mind your needs and objectives.
Frequently Asked Questions (FAQs)
- What do you mean by the term ‘annuity’?An annuity is the regular stream of income paid by the insurance company after a certain period of time for policyholders who have invested in annuity plans. Under an annuity contract, a series of premium payments made by you build a corpus at the end of the policy term. And, that lump sum corpus will be paid out as a steady stream of income during retirement.
- Who is the beneficiary?The beneficiary is the person or entity who is eligible to receive the policy proceeds after the death of the policyholder.
- What is an endowment policy?An endowment policy is an assurance contract that comes with dual benefit of savings and protection. In case the policyholder dies during the policy term, the death benefit or the sum assured plus the bonus payable if any will be paid to the designated beneficiary. In case the policyholder survives the policy period, survival benefit (for the premium invested) will be paid on maturity.
- What are the areas that are not covered under life insurance policies?There are certain things that are generally excluded from life insurance policies. Following are the exclusions:
- Unlawful activities
- Self-inflicted injury, suicide or attempt to suicide
- Sexually transmitted diseases such as HIV/AIDS
- Alcohol and drug abuse
- War and nuclear perils
- In the case of health insurance policies, what happens to the coverage once the claim is filed?After the payment of a claim, the coverage limit will be reduced to the extent of payment made. For example, let’s say health insurance is purchased for a year with a sum insured of INR 2, 00,000. You can file a claim for INR. 1, 00,000 then the limit will be reduced to INR 1, 00,000 (2, 00,000 – 1, 00,000).