Meaning of "send as sms when imessage is unavailable"?
This option means when a user with iMessage doesn't have an Internet connection or iMessage is disabled.

For example:
One day while chatting with a friend via iMessage your friend goes into a tunel and disconnects from the Internet, your iPhone detects that your friend is off-line. If the option "send as SMS when iMessage is unavailable" is enabled, 
the messsage will be send as an SMS. If the option "send as SMS when iMessage is unavailable" is disabled, the message will only be sent as an iMessage when your friend comes back online.