The term “assurance” is not commonly used where risk management concerned. What has happened is that “assurance” has been unofficially incorporated into the “insurance” concept. As time goes by, meanings tend to change or one concept becomes incorporated into another through usage. This is precisely what happened with the terms “insurance” and “assurance”.
There are two fundamental ways of distinguishing whether a policy is assurance or insurance.
a) By definition
i) Assurance is coverage for the risk that an event is bound to happen
ii) Insurance is coverage for the risk that an event might happen
The issue is whether a policy is assured to pay as the event occurs or not. The only insurable event that is certain is death. Other insurable events like natural disasters or arson are events that are not guaranteed to occur. The insurability of probable events is dependent on the likelihood of it happening.
Even with life insurance, insurers know that the event will happen, but are concerned with the likelihood of it happening sooner or later in each case. Once the policy contract is in force and due premiums are paid, assurance plans have to honour the full amount of coverage purchased.
b) Whether the policy is assured to pay at maturity
Refundable term plan, cash-value life insurance and endowment policies are assured in the sense that they guarantee a payout. Whether this payout is the sum assured or maturity value; the fact that it would result in a disbursal by the insurer makes these “assurance” plans.
Sum insured versus sum assured
When examining life insurance policies, the term “sum assured” is used to describe the coverage amount. The sum assured is what must be disbursed once death occurs within the prescribed period (with all other things being covered). However, let’s assume that you insure your home for one million. That is not an assured sum even if the event occurs, because the amount paid would depend on various factors like the value of the property (if less than the sum insured) and the extent of damage.
It must be made clear that whether it is “assurance” or “insurance”, there must be an element of uncertainty. An event, such as death, is bound to happen at some point or the other. However, there is uncertainty about the timing of the event. That concept makes death insurable in most cases.
It is best to illustrate the difference in the two definitions with an example. Let’s take a Universal Life policy. This type of policy has a cash value (guaranteed to pay out) and covers death (up to age 100). If the insured dies before 100, then the sum assured is paid. If the plan matures, then the residual cash value is paid. By both accounts, the Universal Life policy is an assurance plan.
However, the Universal Life plan can contain an insurance element. These plans usually have optional supplementary benefits like critical illness or a double indemnity benefit (Accidental Death). The accidental death rider stipulates that the sum assured would be doubled only if the insured’s death is accidental. This is not a guaranteed payout on the plan, so it constitutes an element of insurance within an assurance plan.
The confusion between the terms arises from the fact is that the term “assurance” is not overtly used again. Assurance plans and insurance plans are collectively referred to as “insurance”. Still, it must be noted that there is an element of risk with guaranteed events and events that might occur.