Definition of Assurance
Assurance is an insurance product that provides financial protection or compensation against an eventuality that is certain to happen, such as death. Unlike typical insurance which covers potential risks, assurance pertains to predictable outcomes and essentially guarantees a payout upon the occurrence of the covered event. The most common form of assurance is life assurance, often referred to as whole life insurance.
Examples
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Life Assurance Policy:
- Mr. Smith purchases a life assurance policy to provide financial security for his family. Upon his death, a guaranteed sum is paid to his beneficiaries.
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Endowment Assurance:
- Ms. Johnson buys an endowment assurance policy that will pay a lump sum either on a fixed maturity date or upon her earlier death.
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Critical Illness Assurance:
- Mr. Brown gets a critical illness assurance policy, guaranteeing a payout if he is diagnosed with any of the specified critical illnesses covered by the policy.
Frequently Asked Questions (FAQs)
What is the difference between assurance and insurance?
Assurance covers events that are certain to happen, such as death, whereas insurance covers risks that might happen, like accidents or theft.
How does life assurance work?
Life assurance provides a financial payout to the insured’s beneficiaries upon death. Payments might also be made on specific maturity dates for policies combining elements of savings and investment.
Is assurance the same as life insurance?
Assurance, often referred to as life assurance, is a type of life insurance but specifically denotes products where the event (such as death) is guaranteed to occur, resulting in a certain payout.
What are some benefits of buying a life assurance policy?
Benefits include providing security and financial stability to beneficiaries, potentially building savings over time, and peace of mind knowing that a guaranteed payout is assured.
Can critical illness coverage be included in life assurance?
Yes, many life assurance policies offer riders or additional coverages, including critical illness coverage, providing a payout upon diagnosis of specified illnesses.
- Insurance: A financial product that provides protection against potential future losses or risks.
- Term Life Insurance: A life insurance policy that provides coverage for a specified term or period. The death benefit is only paid if the death occurs within the term.
- Whole Life Insurance: A type of life assurance providing lifetime coverage with both a death benefit and a savings element.
- Endowment Policy: An insurance policy that pays a lump sum after a specific term or on earlier death.
Online References
- Investopedia - Life Assurance
- The Balance - Understanding Assurance Policies
- PolicyBazaar - Life Assurance Plans
Suggested Books for Further Studies
- “Life Insurance: A Consumer’s Handbook” by Joseph M. Belth
- “Essentials of Insurance: A Risk Management Perspective” by Emmett J. Vaughan and Therese Vaughan
- “Principles of Risk Management and Insurance” by George E. Rejda and Michael McNamara
Accounting Basics: “Assurance” Fundamentals Quiz
### What is the primary difference between insurance and assurance?
- [ ] Insurance covers certain events, assurance does not.
- [x] Assurance covers events guaranteed to happen whereas insurance covers risks that might happen.
- [ ] Insurance applies to long-term, assurance applies to short-term.
- [ ] There is no difference between the two.
> **Explanation:** Assurance covers events that are guaranteed to occur, like death, whereas insurance covers potential risks such as theft or injury.
### Which of the following is the most common type of assurance?
- [ ] Vehicle insurance
- [ ] Health insurance
- [ ] Travel insurance
- [x] Life assurance
> **Explanation:** Life assurance is the most common type of assurance, providing a guaranteed payout upon the insured individual’s death.
### How does life assurance provide financial security?
- [ ] By paying dividends monthly.
- [ ] By waiving all future premiums.
- [x] By offering a guaranteed payout to beneficiaries upon death.
- [ ] By covering daily living expenses.
> **Explanation:** Life assurance provides financial security by guaranteeing a payout to the beneficiaries upon the death of the insured individual.
### Which of the following is true regarding endowment assurance?
- [x] It pays a lump sum at policy maturity or death, whichever comes first.
- [ ] It only pays out on death.
- [ ] It does not have a maturity date.
- [ ] Payments continue indefinitely without benefits.
> **Explanation:** Endowment assurance policies pay a lump sum either on a specific maturity date or upon the earlier death of the insured.
### What type of event does assurance typically cover?
- [ ] Possible risks
- [x] Certain events
- [ ] Wear and tear
- [ ] Hypothetical scenarios
> **Explanation:** Assurance typically covers certain events, that are guaranteed to happen, such as death.
### What distinguishes whole life insurance from term life insurance regarding assurance?
- [ ] Whole life insurance covers short-term risks.
- [x] Whole life insurance is a type of assurance providing lifetime coverage with a savings component.
- [ ] Term life insurance offers a guaranteed payout regardless of the term.
- [ ] Term life insurance accumulates a cash value.
> **Explanation:** Whole life insurance is a type of assurance that offers lifetime coverage with a death benefit and a savings element, contrasting with term life insurance, which provides coverage for a specific period.
### What additional coverage can a life assurance policy include?
- [x] Critical illness coverage
- [ ] Travel insurance
- [ ] Automobile insurance
- [ ] Pet loss coverage
> **Explanation:** Many life assurance policies offer riders or additional coverages, including critical illness coverage, ensuring a payout upon diagnosis of specified illnesses.
### What happens when the insured event in an assurance policy occurs?
- [ ] The policy terminates without payment.
- [x] The policy provides a guaranteed payout.
- [ ] Premiums continue to be charged.
- [ ] The policy automatically renews.
> **Explanation:** When the insured event occurs, assurance policies provide a guaranteed payout to the beneficiaries or insured party.
### Why might someone opt for life assurance over other types of insurance?
- [ ] To insure against property damage.
- [ ] To avoid medical coverage.
- [x] To secure a guaranteed payout for dependents after death.
- [ ] To cover vacation expenses.
> **Explanation:** Someone might opt for life assurance to ensure a financial payout for dependents upon their death, providing long-term security and protection.
### Why is life assurance considered a financial planning tool?
- [ ] It pays immediate dividends.
- [ ] It prevents all financial losses.
- [x] It ensures dependents are taken care of financially after the insured’s death.
- [ ] It provides daily living expenses coverage.
> **Explanation:** Life assurance is considered a financial planning tool because it guarantees that beneficiaries receive a payout upon the insured's death, ensuring their financial stability.
Thank you for exploring the concept of assurance and testing your understanding through our detailed quiz. Continue building your expertise in financial planning and risk management!
