Most people are aware of the necessity of insuring themselves and their loved ones with adequate insurance. However, when you buy life insurance or any other insurance policy, you must understand the policy wording completely. It helps you make an informed buying decision and avoid unpleasant surprises at the time of claim settlement.
Two commonly used terms in insurance are ‘insurance’ and ‘assurance’. Both these terms are used for financial coverage under an insurance policy. While you may have been using these terms interchangeably till now, there is a clear difference between insurance and assurance.
What is Insurance?
Insurance is a legally binding contract between two parties: the insurer or the party selling the insurance and the policyholder or the party buying the insurance. Under this contract, the insurer promises to compensate or reimburse the policyholder in case of a particular loss. In exchange, the policyholder pays the premium to the insurer.
The reimbursed amount is usually equivalent to the monetary value of the loss incurred by the policyholder. Usually, an insurance policy has a fixed tenure during which the insurance contract is valid. The insurer is liable to compensate the policyholder only till the policy term is active.
Example of Insurance
Mr. Sahai purchased a bike insurance policy for his new motorcycle. Since he wanted the best coverage for his two-wheeler, he purchased a comprehensive bike insurance policy. He bought the policy for a 3-year tenure. He pays the premium for the insurance policy every month.
The policy covers him against several risks, such as damage to a third party due to his bike, own damages to himself or his bike, theft or total damage of his bike due to man-made or natural causes, etc. If any of the covered events occur, the insurer will provide him with a sum insured to compensate for the extent of his financial loss.
What is Assurance?
The term assurance is usually associated with life and term insurance policies. Under such policies, the policyholder or the plan beneficiary receives a predetermined sum assured as compensation for certain events such as permanent disability or death of the insured or the completion of the policy term. The tenure of these policies is usually longer than general or standard insurance policies.
Types of Assurance
Here are some popular types of assurance:
- Term Insurance
- Whole Life Insurance
- Unit Linked Insurance Plan (ULIP#)
Example of Assurance
Mr. Sahai also bought a pure term insurance plan for him. He nominated his wife as the policy nominee. He pays the policy premium regularly for the term plan. In case of Mr Sahai’s death during the policy term, his wife will receive the sum assured on Mr Sahai’s term insurance policy. She can use this lump sum amount to continue living a respectable life in the absence of her husband and secure her and her children’s future financially.Insurance Vs. Assurance
Why Should You Buy Insurance?
General insurance and life insurance policies provide specific coverage against events and situations that could otherwise financially drain you.
For example, a critical illness may require complicated, expensive, and prolonged treatment. Getting such a treatment out of your pocket can be a huge financial burden and may drain your savings completely. In such cases, an insurance policy can provide you with the necessary financial support and protect your savings.
Similarly, a term insurance plan from a reputed insurer ensures your loved ones are not left without financial support in your absence. By paying a small premium, you can secure your family’s future and be stress-free for life.
The Bottom Line
While it is necessary to buy life insurance, health insurance and other necessary general insurance plans, it is equally essential to understand the various jargon associated with insurance policies.
Insurance and assurance are two commonly used terms in insurance. Insurance is the compensation or reimbursement the insurance company provides to compensate for the monetary loss due to a covered event. On the other hand, assurance is the sum assured provided as financial support to the insured or the plan beneficiaries on the occurrence of an insurance event. Understanding the difference between insurance and assurance is necessary if you plan to buy insurance.
