A lot of our customers at Ditto often get confused between the terms "insurance" and "assurance", and for a good reason. These terms are often used interchangeably, and yet they are two completely different concepts. While both are safety nets against unforeseen events, their structures, purposes, and benefits differ significantly. So, in this article, let’s understand the difference between the topics – Insurance and Assurance.
Difference between insurance and assurance
| Feature | Insurance | Assurance |
|---|---|---|
| Definition | Covers uncertain events that may or may not happen. | Provides coverage for events that are certain to occur. |
| Risk it Insures | Protects against potential risks (e.g., accidents, illness, property damage). | Covers inevitable events like death. |
| Payout Condition | Compensation is given only if the event occurs within the policy tenure | Guaranteed payout either upon death or after a fixed term, as long as the policy is active |
| Tenure | Specified period | Lifetime coverage |
| Premium | Usually lower, but it depends on risk assessment | Generally higher due to guaranteed payout and coverage till death |
| Examples | Health insurance, term insurance, car insurance, etc. | Life insurance (whole life, endowment policies). |
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Definition of Insurance
First things first. Insurance is a contractual arrangement wherein an insurance company protects its policyholders from losses or damages. There are several types of insurance policies, such as health, term, travel insurance, etc. So, let’s say you are a policyholder paying premiums to an insurance company, which, in return, commits to compensating you for specific losses arising from events such as accidents, thefts, natural disasters, or health-related issues.
The essence lies in its focus on events that may or may not occur. For example, health insurance covers medical expenses incurred due to illnesses or injuries, while term insurance offers financial protection to your beneficiaries if you pass away within a specified period. In both cases, the event triggering the payout is uncertain and not guaranteed to happen.
Definition of Assurance
Assurance, on the other hand, pertains to specific products that provide a guaranteed benefit, usually associated with events that are certain to occur, such as death. Unlike insurance, which deals with uncertainties, assurance offers a definite payout.
Life assurance policies, or whole life plans, as many would know, are prime examples of this. These policies ensure that you receive a predetermined sum upon your death, regardless of when it occurs, provided the policy is active. This guaranteed payout is what underscores the principle of assurance, offering you peace of mind.
Types of Insurance Policies
The term ‘Insurance’ (not to be confused with term insurance) consists of various categories, each designed to handle one specific risk. Let’s look at a few of them now:
- Health Insurance: Health insurance covers medical expenses, including hospitalization, surgeries, and related treatments. You pay a premium for coverage during a certain period, usually 1 year, and you can claim the hospitalization amount on a cashless or reimbursement basis.
- Term Insurance: Term insurance is a type of life insurance that provides financial protection for a fixed period. Hence, term. If you pass away during the specified term, the insurer pays a death benefit to your nominee. However, if you survive the term, the insurer will not make any payment. It is an affordable way to secure financial support for dependents in case of your untimely death.
- Motor Insurance Motor insurance protects against vehicle losses or damages due to accidents, theft, or natural calamities. It may also cover the amount you must pay the other person if you are involved in an accident and it is your fault. This is called third-party liability arising from the insured vehicle's use.
- Travel Insurance: Travel insurance covers risks associated with your travel – such as trip cancellations, lost luggage, medical emergencies, and other unforeseen incidents during a journey.
In these types of policies (and many others), you pay the premium to mitigate your risk during a certain period. While some policies offer a return of premium upon maturity if you don’t make a claim, not all insurers offer this and it often comes with higher premiums to begin with.
Types of Assurance Policies
While insurance provides a safety net during a specific period, life assurance plans provide guaranteed benefits. Let’s take a look at two of the most common ones now:
- Life Assurance (Whole Life Policies): These policies ensure a payout to your beneficiaries upon death, regardless of when it occurs. You can pay the premium throughout your life or for a specified period.
- Endowment Plans: These combine life assurance with savings. The insurer pays out a lump sum after a specific term or upon your passing, whichever is earlier. Here is a more detailed article that we wrote about endowment policies.
In assurance policies, you pay the premiums for a guaranteed payout, ensuring financial support for your family or personal goals after retirement. Now, naturally, you might be wondering how the premiums for this fare against other insurance plans.
Premium Differences between Term Insurance and Life Assurance (Whole Life) Plans
When it comes to comparing insurance and assurance, the only fair comparison would be to look at term insurance and whole-life plans, as they are of a similar nature – coverage for death. So, let’s take a look at just that:
- Term Insurance Plans:
Term insurance is the most cost-effective form of life insurance because it provides pure protection without any investment or savings. Since the policy only pays a death benefit if you pass away during the term, the premiums are significantly lower compared to whole-life plans. - Whole-Life Plans:
On the other hand, whole-life policies and certain life assurance plans have a guaranteed payout – either upon death or maturity. A portion of the premium goes towards building your payment corpus, and in some cases, you can also borrow or withdraw this amount. Due to this, premiums are substantially higher.
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Conclusion – Should You Choose Insurance or Assurance?
Now, the ultimate question is what you should choose – insurance or assurance. As with any financial product, it all depends on your goals and how much you’re willing to spend on premiums. Suppose your primary goal is to protect yourself against potential losses resulting from unforeseen events, such as health issues, accidents, or property damage. Insurance policies offer a safety net, ensuring that such unexpected incidents do not lead to financial hardship. On the other hand, life assurance policies offer a guaranteed payout, albeit with higher premiums, which may or may not be worth it.
