Frequently Asked Questions
I hear the terms "insurance" and "assurance". How are they different?
Life insurance (Life Assurance in Britain) is a type of insurance. As in all insurance, the insured transfers a risk to the insurer, receiving a policy and paying a premium in exchange. The risk assumed by the insurer is the risk of death of the insured.
Insurance vs. Assurance
The specific uses of the term "insurance" and "assurance" are sometimes confused. In general, the term insurance refers to providing cover for an event that might happen while assurance is the provision of cover for an event that is certain to happen.
When a person insures the contents of their home they do so because of events that might happen; fire, theft, flood etc. Insurance is a way of spending a little money to protect against the risk of having to spend a lot of money. The point is, when a person insures their home contents they do so to provide protection against something that might happen. They hope their home will never be burgled, or burn down but they want to ensure that they are financially protected if the worst happens.
When a person insures their life they do so knowing that one day they will die. Therefore a policy that covers death is assured to make a payment. The policy offers assurance on death; even if the policy has a prescribed termination date the policy is still assured to pay on death and therefore is an assurance policy. Examples include Term Assurance and Whole of Life Assurance. An accidental death policy is not assured to pay on death as the life insured may not die through an accident, therefore it is an insurance policy.
A policy might also be assured for other reasons. For example an endowment policy is designed to provide a lump sum on maturity. Under certain types of policy the lump sum is guaranteed. Therefore, this may also be called an assurance policy.
The test of whether a policy is assurance or insurance is that with an assurance policy the insured event will definitely occur (at some point) whereas with an insurance policy there is a risk the insured event might occur.
With regard to Whole Life policies, the question is not whether the insured event (in this case death) will occur, but simply when. If the policy has nonforfeiture values (or cash values) then the policy is assured to pay.
During recent years, the distinction between the two terms has become largely blurred. This is principally due to many companies offering both types of policy, and rather than refer to themselves using both insurance and assurance titles, they instead use just the one.
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