What is insurance?

Understand insurance premiums, deductibles, coverage limits and claims processes. Then, take a look at how car, business, home and life insurance actually function in Canada. This guide breaks down the many moving parts of insurance coverage, clears up common misconceptions and shows you exactly how insurance works using real-life scenarios, so you can make a confident decision before buying or renewing your policy.

Key takeaways:

• Risk is spread out across policyholders: Your premium is paid into a shared fund, which reduces your financial exposure.

• Deductible vs. limits: Deductibles are what you pay to your insurance company during a claim, while a limit is the maximum amount your provider covers.

• Per-event vs. aggregate: Liability limits apply to each event, not per year.

• Not all claims require a deductible: It depends on the individual policy.

• Endorsements matter: Some perils, like sewer backup, non-collision damages and valuable items, may require additional add-ons to ensure coverage.

Speak with a BrokerLink advisor for more information or get a free, non-obligation quote online now.

What insurance does

Insurance functions on the principle of sharing risk among policyholders. Instead of facing a large financial burden if something bad happens, you pay a small premium each month. This money is then pooled into a shared account with all other premiums, which an insurance company will then use to cover losses.

How it works:

1. You pay a premium: The money goes into a pooled account.

2. A covered loss occurs: The pooled account pays for the damages.

3. Deductible applies: You pay your deductible (if applicable to your policy).

4. Settlement up to your coverage limits: Your insurance provider covers the remaining costs up to your policy maximum.

For example, if your vehicle is stolen, your comprehensive coverage will pay for repairs or replacements after you pay your deductible, which can range between $500 and $1,000 or more, before your insurer pays the rest. However, liability claims, like when someone is injured during a car accident you cause, don’t typically have a deductible.

Key terms to know

Understanding how insurance works starts with understanding common industry language. Here are some important terms you need to know:

• Insurer: An insurer is the insurance company that is providing you with coverage.

• Policyholder: The person named on the insurance policy. For example, you purchase a life insurance policy under your name, making you the policyholder.

• Policy limit: The maximum amount of money that an insurance company will pay out in the event of a claim. For example, the limit on your liability coverage for your home insurance may be $1 million, which means your insurance provider will cover you financially up to that amount.

• Premium: The amount of money that the policyholder agrees to pay to the insurance company in exchange for their coverage. For example, based on your risk profile, you may be quoted $2,250 per year or $187.50 per month by your insurance company to protect your vehicle.

• Term: The length of time period that the insurance policy is valid. For example, most insurance policies are valid for 12 months before they need to be renewed.

• Deductible: The amount of money that the policyholder is responsible for paying out of pocket before the insurance company will issue a payout. For example, if your claim is $3,000 and your deductible is $500, you pay that $500 to your provider before they pay the remaining $2,500.

• Claim: An official request that the policyholder makes to the insurance company to cover the cost of an incident. For example, you get into a car accident and need your insurance company to pay for the damages to your vehicle.

• Exclusions: Something your insurance policy does not cover. For example, intentional damages or harm to third parties.

• Endorsement: Extra coverage you can purchase to protect you from specific perils not included in standard plans. For example, overland floods or sewer backups.

• Actual cash value vs. replacement cash value: Actual cash value compensates you based on the depreciated amount of your lost or damaged possession. Replacement cash value compensates you based on the cost to rebuild or replace your possessions in today’s market.

• Occurrence vs. claims-made: Common for business insurance liability coverage. An occurrence is a covered event that happens during your policy. Claims-made is covered if the claim is reported during your policy term.

Broker vs. insurance company vs. MGA

Here's what each one does:

• Insurance company: Provide financial protection to policyholders.

• Insurance broker: Help you compare, buy and review policies.

• Managing general agent (MGA): Distributes and manages policies for different insurers.

How claims work

As you know, the main benefit of purchasing insurance is being financially protected if something goes wrong. Should an incident occur, you can seek financial compensation from your insurance provider by filing an insurance claim. You should follow these steps:

1. Notify your insurer or broker

When something bad happens, whether it be a car accident, a slip-and-fall or a kitchen fire, you’ll need to contact your insurance company to inform them about the incident. As a general rule of thumb, you’ll want to inform your provider as soon as possible to protect your claim’s validity.

The easiest way to notify your insurance company is over the phone, but you can also file online. Provide the time, location and a brief description of what happened. From there, an insurance agent will explain the next steps and answer any questions you may have.

2. Document and mitigate the loss

Along with any official paperwork that needs to be completed, you will also be asked to provide any relevant evidence that you have to support your claim. This will look a little bit different depending on the type of claim that you are filing.

For example, for a car insurance claim, most insurance experts recommend submitting photos and videos of the accident scene, the police report, witness statements and detailed documents of any injuries sustained, such as medical reports. To mitigate damages, move your vehicle to the side of the road and contact emergency services to show your insurer you took reasonable steps to mitigate damages.

3. Submit your insurance claim

Step number three is to submit your insurance claim. Fill out the necessary forms and submit them along with your evidence. The more evidence you submit, the more information your adjuster has to assess your case. Wait to receive confirmation that your claim has been submitted.

4. Adjuster review and investigation

After your insurance claim is officially submitted, your insurance company will assign a claims adjuster to your case. They will review the forms and evidence you submitted and conduct an independent investigation to determine whether your claim should be approved and, if so, what amount of money you should receive.

When their investigation is complete, they will make a formal recommendation to your insurance company. There is a chance that the insurance adjuster will contact you during this stage if they have any questions or require additional information, so make yourself available to them during this time.

5. Settlement determination

Insurance settlements are often base on actual cash value (ACV) or replacement cost value (RCV) for property insurance claims. Actual cash value accounts for depreciation, while replacement cost value pays for the full cost of replacements. For example, if the three-year-old laptop you paid $3,000 for brand-new is stolen, ACV will take into account the depreciated value of your laptop, which may be calculated as only $1,700, while RCV will provide full $3,000 compensation.

Note that deductibles will be subtracted from your payout when applicable. For liability insurance claims, like auto insurance or business insurance (commercial general liability), deductibles are not typically required. In contrast, claims arising from collision, comprehensive and property insurance claims often require a deductible.

6. Payout and repair

When the insurance company has reached a decision, it will contact you to update you on the status of your claim. If your claim has been approved, they will state how much your payout will be, as well as how and when you can expect to receive it. Keep in mind that the entire claims process can take up to a month and sometimes longer. Once you receive a final decision from your insurance company, it could take another two weeks to receive your payment.

Example scenarios

Let's take a look at some realistic situations that could happen:

• Auto insurance: Your vehicle is damaged in a windstorm. Your insurance helps protect you from the financial burden of covering all repair costs yourself, but only after you pay your deductible of $500.

• Home insurance: Your kitchen catches fire. Replacement cost value covers the entire repair bill (minus your deductible), while actual cash value considers the depreciated value of your appliances, cabinets, etc.

• Business insurance: A slip and fall accident occurs at your cafe. Commercial general liability insurance pays for your legal and settlement costs, like medical expenses, legal fees and more, from the start of the event date, not when you report your claim.

Key takeaways

Here's what you should keep in mind:

• Deductible amounts only apply to your own damage.

• Auto insurance liability limits are per occurrence, not per policy term.

You pay your deductible, which is subtracted from your settlement funds.

What affects your insurance policy premium (and what you can influence)

Your insurance premium isn’t random. It’s based on the risk you pose to your insurer. Those with higher risk profiles can anticipate higher premiums, while those with lower risk profiles will generally pay less for their coverage. The good news is that some factors used by insurers to determine your rates during the underwriting process are within your control and understanding these factors can help you manage your costs. Let's take a closer look:

Auto insurance factors

A lot can affect your auto insurance premium, such as:

• Where you live: Urban areas like Vancouver, Toronto and Montreal tend to have higher claim rates than rural areas like Grand Prairie, Brandon or Cape Breton, meaning higher rates.

• Age: Young, new drivers are more likely to be involved in a fatal collision, according to CARSP, compared to older, more experienced motorists.

• Gender: Compared to young female drivers, young male drivers between the ages of 16 and 21 are engaged in accidents three times as often, according to ICBC.

• Vehicle type: Sports cars and luxury vehicles cost more to insure compared to standard cars and therefore will experience higher premiums.

• Driving record: Those with multiple convictions, traffic tickets and accidents will pay premiums that are higher than those with clean driving records.

• Past claims: The more insurance claims you file, the higher the financial risk you pose to your insurance company compared to someone with few or no claims on their file.

• Number of kilometres you drive: The more time you spend behind the wheel, the higher your risk of being in an accident, which means you’ll pay more for insurance than someone who drives infrequently.

• Type of coverage on your policy: Optional auto insurance coverage, like collision and comprehensive, will increase your premiums, while opting for standard coverage will lower your premiums.

• Your deductible(s): Higher deductibles typically yield lower premiums and vice versa.

Home insurance factors (condo/tenant included)

Your home insurance premium is calculated with the following in mind:

• How valuable your home is: Higher property values require more comprehensive homeowners insurance, which will cost more than properties with lower values due to rebuild costs and construction/material costs.

• Your neighbourhood: Neighbourhoods with higher crime rates and natural disaster risk (wildfires and flooding) will have higher homeowners’ insurance premiums than homes located in low-risk neighbourhoods.

• How close your home is located to emergency services: Homes located near hospitals and fire stations are at less of a risk than those located further away from these emergency services.

• The materials, age and condition of the roof on your home: Older roofs are more prone to damage and claims than newer roofs constructed from durable materials.

• The type, age and condition of the heating system: Older systems like oil tanks or wood stoves may lead to higher premiums due to their safety and damage risk.

• The type, age and condition of the electrical system in your home: Homes with outdated electrical systems are more prone to electrical fires than homes with updated electrical systems.

• The type, age and condition of the plumbing system in your home: Outdated, poorly maintained plumbing is more prone to water damage, which will increase your rates compared to homes with modern plumbing systems and fixtures.

• Home security systems: Properties with modern security systems, video cameras, motion lighting, backup valves, sump pumps and other measures often qualify for discounts and lower rates compared to homes without preventative measures in place.

• Type of coverage on your policy: Optional endorsements and higher coverage limits will cost more than standard policies.

• Your deductible(s): Again, higher deductibles can lead to lower rates, but you will need to pay more out of pocket in the event of a claim.

• Your claims history: The more claims on your insurance history, the more of a risk you are to your insurance company, raising your rates.

The price of home insurance has increased significantly in recent years across Canada. According to research by the Insurance Institute of Canada, during the past 10 years, average rates have risen by around 76%, with certain provinces, like Alberta and Saskatchewan, reporting hikes of almost 106%, largely due to an increase in the frequency of catastrophic weather events like flooding, hail and windstorms and wildfires.

Business insurance factors

Your insurance broker may ask you to provide them with the following information:

• Your years of experience in the industry: Businesses with years of operating experience are often seen as lower risks to insurance companies compared to those with minimal experience operating in certain sectors.

• Location: Location also matters. Those operating out of older buildings, in neighbourhoods with higher crime rates or businesses with higher foot traffic, can see higher rates.

• The annual and projected gross revenue of your business: The higher your gross revenue in a year, the more you have to lose in the event of a claim, which requires higher limits and additional business insurance policies to ensure comprehensive financial protection.

• The number of employees at your business: The more employees you have, the greater the risk of accidents, internal claims, employee theft and other risks, which means greater insurance costs than small businesses and sole proprietors.

• Your insurance claims history: The more commercial insurance claims you have, the more you’ll pay for coverage.

• The products or services offered by your business: Businesses operating in higher-risk sectors like construction will pay more for coverage than low-risk sectors like book sales.

• Whether your business operates online, in-store or both: Businesses with physical locations are at risk of customer injuries and theft, while online businesses are exposed to cyber threats.

• Security measures: Having safety measures in place, like security cameras, alarm systems, cyber security measures, anti-slip mats and more, can qualify your business for discounts and lower rates.

Factors in your control vs. factors you can’t easily change: Summary table

Let's take a closer look at what's in your control and what's not:

Pro tip: Work with a broker like BrokerLink to review your current insurance coverage, deductible levels and risk exposures to craft an insurance plan that provides ample financial protection while making your premiums manageable. Contact us today to learn more!

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Types of insurance plans in Canada

In Canada, there are numerous types of insurance policies you can purchase to ensure you are financially protected against unexpected expenses and losses following an insured event out of your control. Some of the most common types of insurance purchased include:

Auto insurance

The federal government has made car insurance mandatory for all drivers across Canada, regardless of which province they reside in. This means that if you want to get behind the wheel, you will need to purchase an auto insurance policy. However, because car insurance coverage is regulated on a provincial level, the types of insurance coverage you need and the minimum requirements will vary. For example:

Mandatory vehicle insurance

You will need:

• Third-party liability insurance: Offers policyholders financial protection in the event they cause an accident that causes third-party injuries or property damage. Your insurer pays for medical bills, legal fees, repairs, replacements and settlement funds up to your coverage limits. There is no deductible.

• Accident benefits: Helps cover medical expenses and lost income if you, your injuries or pedestrians are injured in a collision, regardless of fault.

Optional auto insurance

Coverage you can choose to include:

• Collision: Covers damages to your vehicle following an at-fault accident. A deductible applies to this insurance policy.

• Comprehensive: Covers damages to your vehicle following non-collision events such as theft, vandalism, fire, falling/flying objects and severe weather. A deductible also applies.

• Endorsements: Endorsements are add-ons that can extend coverage. This includes SEF and OPCF forms, which cover risks like collisions with uninsured vehicles and rental cars following collisions.

• Waiver of depreciation: Allows you to replace your vehicle at its full cost rather than its depreciated value (varies by province and insurer).

Review your third-party liability insurance limits, deductibles and mandatory/optional policies with a BrokerLink advisor today!

Homeowners insurance

Home insurance or property insurance, is a type of insurance plan that is designed to protect a person’s home and personal belongings from damage and losses resulting from insured events like personal liabilities, theft, vandalism, fire and severe weather. There are policies for both homeowners and those who rent their homes. Let's take a look:

RCV vs. ACV

You can choose from the following:

• Replacement cost: Pays the full cost to rebuild your home or replace your belongings without factoring in depreciation. These premiums typically cost more, but offer greater financial protection.

• Actual cash value: Pays you the depreciated value of your home or personal belongings. These insurance plans often cost less.

Endorsements

Sewer backup, overland flood, high-value items and identity theft are all optional endorsements that can expand your financial safety net.

Additional living expenses

If your home suffers damage to the extent that it is no longer safe to live in, additional living expenses will cover temporary housing, meals and transportation costs until you’re able to safely return home.

Example scenario

Basement floods: Only covered by homeowners’ insurance if you’ve added a sewer backup endorsement to your plan.

Pro tip: Work with BrokerLink to determine your rebuild costs and personal item values to ensure you’re properly protected.

Business/commercial insurance

Business insurance, which is also referred to as commercial insurance, is designed to protect businesses of all sizes from the risks they face. Here's what you should know:

Core coverage

Here are basic business/commercial insurance coverages:

• Commercial general liability (CGL): Insurance covers you against third-party bodily injuries and property damage.

• Property insurance: Protects your buildings, equipment and inventory.

• Business interruption: Compensates for financial loss following an insured event that renders your business temporarily closed for the foreseeable future.

• Crime coverage: Covers theft, employee dishonesty and financial loss that occurs within your business.

Occurrence vs. claims-made

Here's what you should know:

• CGL is an insurance plan that is typically occurrence-based, meaning any incident that occurs during your policy term will qualify for coverage up to your policy limits.

• Professional liability (errors and omissions), in contrast, is claims-made, meaning only claims reported during your policy term qualify.

Cyber and data breaches

It's important to remain diligent. Always be aware that:

• Cyberattacks have increased significantly, reaching their greatest level since 2019 at 30% in 2025 compared to 21% in 2024, according to NOVIPRO.

• Cyber insurance covers client notification, legal fees and data recovery costs.

Pro tip: Partner with BrokerLink to review your business’s current risk-management plan and ensure your business insurance plan reflects the unique risk exposures it faces daily.

Life insurance policy

Life insurance policies act as a financial safety net for your family members and loved ones should something unexpected happen. Life insurance is unique in that the policyholder agrees to pay a life insurance premium to an insurance company in exchange for the insurance company issuing a tax-free payout to a beneficiary. Take a look:

Term vs. whole life insurance

Let's take a look at the difference:

• Term life insurance: Term life insurance offers temporary coverage during a set period (10 to 20 years). It is more cost-effective and is a good idea if you are a young family with a mortgage and are raising children.

• Whole life insurance: Whole life insurance policies offer coverage that lasts your entire life with more expensive premiums. This is ideal for long-term planning.

Naming beneficiaries

Naming beneficiaries offers financial security to your family members should something happen to you. Make sure to clearly state your primary and contingent beneficiaries.

Tax notes

Death benefits are often tax-free to the named beneficiaries.

Pro tip: Review your life insurance policy following major life events like marriage, new children, retirement and home purchases with a BrokerLink advisor for peace of mind and financial security.

Choosing limits and deductibles

Choosing the right insurance limit and deductible is one of the most important steps to tailoring your insurance plan to your unique needs, budget and risk tolerance. You should consider the following:

Insurance policy

The insurance policy limit is the next key component of any insurance policy. An insurance limit is the maximum amount of money that an insurance company will pay toward a covered claim. If and when you reach your coverage limit, your insurance company will not be responsible for these costs. Instead, you will need to pay the costs out of pocket.

Maximum policy limits are set for the policy term. For example, if you choose a $200,000 limit for the third-party liability coverage in your car insurance plan, then you will only be covered up to this amount. If you get into multiple accidents over the course of your policy term and costs exceed $200,000, you will be on the hook for the extra costs. Higher limits offer better financial protection against catastrophic losses. But they do come with a higher price tag.

Insurance deductible

When you receive an insurance reimbursement after you file a claim, your deductible, which is a lump sum payment, will be subtracted from your reimbursement. A deductible is an amount of money that you agree to pay to your insurance company in the event of a claim. Your insurance company will only issue a payout for the remainder of the claim cost after your deductible has been paid.

Deductible amounts can range widely. For example, car insurance deductibles can range from $200 to $2,000. Remember that the higher your deductible is, the cheaper your premium and vice versa. If you can comfortably afford to pay a claim, opting for a higher deductible can save you money over time. In contrast, if your financial stability isn’t where you want it to be, a lower deductible may work better.

Deductible summary table

Take a look:

Common misconceptions

Insurance can be confusing. Let’s clear up some common misconceptions:

1. “Insurance covers everything.”

Not true! Each insurance policy has inclusions and exclusions, along with coverage limits.

1. “I always pay a deductible.”

Not all policies have a deductible. For example, third-party liability insurance has no deductible, while collision and comprehensive do.

1. “Third-party liability limits are per year.”

Third-party liability limits apply per event, not per year.

1. “Replacement cash value means brand-new cash upfront.”

RCV means your insurer covers the full cost of repairs or replacements, but your initial payout may deduct depreciation, which will later be reimbursed once the repairs or replacements are completed.

Contact BrokerLink today

Now that you know the answer to “what is insurance?” including key industry terms, your next step is to tailor your insurance plan to your life, home, car and business. Speak with a BrokerLink advisor today to get personalized advice, compare quotes and qualify for discounts! You can reach us over the phone or use our online quote tool right now.

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FAQs on insurance

What is an insurance deductible and do I always pay one?

A deductible is a lump sum amount you pay out of pocket when filing a claim before your insurance company covers the remaining costs. It only applies to certain policies.

Are auto liability limits per accident or per year?

Auto liability limits are per accident.

How fast should I report a claim?

Report your claims as soon as possible. Ideally, within the first 24 to 48 hours.

Will my premium go up after a claim?

It depends on how fault is determined by your insurer.

How often should I review my policy?

Aim to review your insurance policy at least once a year or after life changes like buying a house, having kids or getting married.