You pay for insurance monthly or annually, depending on your policy, but you might wonder why you have to spend so much money on something that you rarely have to use. Things aren’t completely black and white when it comes to insurance. Yes, you don't have to make a claim often. However, this doesn’t mean you don’t need coverage — sometimes it’s illegal not to have insurance.
In the end, what it comes down to is risk. This is true for all types of insurance, including auto and home coverage. Let’s face it — life is often unpredictable, and you can’t be too prepared for anything nowadays. With that said, you’re going to need insurance in some way or another in your lifetime. It’s time to explore the exciting world of insurance and what the right coverage can do for you.
Insurance explained
In short, insurance is a contract that offers financial protection to the person who signs it. This contract is called a policy. The policy outlines what perils the person who signed the contract will receive coverage for and how much compensation they are entitled to. Examples include car insurance and home insurance, which can help people avoid paying for damages out of pocket.
How does insurance work, and who is involved in the process? We’ll get into that and so much more soon. However, there are a few aspects to address before we dive in. Before purchasing an insurance policy, you should be aware of the following few key terms:
Broker
An insurance broker is your greatest ally. Working separately from insurance companies, your insurance broker will do all the legwork for you. A broker calls around and asks different insurance companies about their rates to help customers find a policy with the coverage that suits their needs.
Insurer
An insurer, also known as an insurance company, is responsible for handling insurance claims. Your insurance company will confirm the details of your loss, review your coverage, conduct an in-person visit and provide the required paperwork. Only once a claim has been filed can any repairs begin.
Policy term
When you purchase an insurance policy, you sign a contract that determines how long your insurance company provides coverage. This amount of time is called a policy term. Once the policy term ends, you can decide to renew your insurance policy or get a new one.
Policy limit
The purpose of making an insurance claim is to receive compensation for perils covered by the insurance policy. However, the amount of money you get does have a limit. Policy limits are the maximum amount that your insurance company will pay out after an incident occurs. Anything higher than that amount is your responsibility to pay for.
Premium
The premium is the rate the customer pays for insurance protection. Factors such as lifestyle, location, claims history, driving habits, employment and characteristics of a home aid in determining insurance premiums.
Deductible
A deductible is the amount of money the policyholder has to pay out of pocket before a claim is paid. Increasing your deductible can sometimes help you save money on your premiums. It’s important to keep in mind that policies and coverages tend to vary, and this isn’t always the case.
Understanding each of these terms is essential when purchasing an insurance policy. Whether you have a basic policy or more extensive coverage, you need to be knowledgeable about the insurance industry to understand your needs better. In the next section, we will learn about policy terms and their restrictions.
About policy terms
It’s time to learn more about policy terms. When an insurance policy is in effect, you can make claims during a set period known as a policy term. After the policy term ends, you have two choices as a policyholder, which are:
Some policyholders stay with their current insurance company, while others may choose to use a broker, which is a great way to shop around for lower rates. If an event covered by the insurance policy occurs during the term, a claim can be filed. To file a claim, the policyholder needs to let their insurance company know what happened and provide proof. From there, the insurer can open an investigation, and the losses can be paid for.
Knowing how long your policy term is allows you to make the most out of your coverage. It lets you use your coverage to your advantage and prevents you from having to pay for damages out of pocket. However, you are usually only entitled to a certain amount of compensation during the term, which is called a policy limit. We’ll explore the various aspects of policy limits shortly.
Policy limits explained
Every insurance policy has a policy limit. This refers to the maximum amount that the insurer will pay out after a claim is filed. The amount is usually listed on the declaration page of the contract. This section is the most important part of the contract. Most people don’t know there is more than one type of policy limit. These include:
Per-occurrence limit
This is the maximum amount of money the insurer will pay out during a single event or claim.
Per-person limit
On your insurance policy, you have the option to set a maximum amount that the insurance company will pay for each person listed on your policy’s claims.
Combined limit
This is a single limit that applies to various types of coverage.
Aggregate limit
Having an aggregate limit on your insurance policy sets the total amount that can be paid out for all claims in a certain period of time.
Split limit
This type of policy limit combines per-occurrence, per-person and aggregate limits.
Special limit
Sometimes, certain items won’t immediately be covered under your insurance policy. This often includes expensive jewellery, artwork or collectibles under homeowners insurance. In the case of auto insurance, this refers to classic or vintage cars. Special limits are how much your insurance company will pay out if these items get damaged or stolen.
Depending on your insurance policy, you may be able to choose your limits. However, some insurance companies will select them for you. Your best bet is to ask your insurance broker or insurance company directly about the terms and conditions of your policy limits.
There are many types of policy limits to learn more about. Becoming knowledgeable about each will help you know how much money you are entitled to if bodily injury or property damage occurs. It will also help you calculate how much will be covered after paying your deductible. Next, we will find out more about deductibles and their effect on insurance products.
Going in-depth about deductibles
A deductible is how much the policyholder has to pay before their insurance company provides compensation for an incident. Review your insurance policy to determine if deductibles apply to the policy or each claim you make.
Insurance companies use deductibles to avoid having to compensate policyholders for small or low-value claims. As a result, having an insurance policy with a higher deductible will result in lower premiums. While it’s true that a higher deductible leads to lower premiums, it’s important to ensure you can afford to pay for your deductible.
Having low deductibles leads to higher premiums. However, a high deductible can reduce your premiums. You just have to be careful because your policy covers the amount that you don’t pay out through your deductible. While your deductible is one component used to calculate your premiums, it’s not the be-all and end-all. Next, we will learn about how an insurance company calculates premiums for each type of insurance policy.
How your insurance company calculates your premiums
Before you can purchase insurance, you need to apply for it and get approved. Your insurance company will determine if you qualify by assessing the amount of risk you bring. In other words, insurance agents use various factors to determine how likely you are to make a claim. In turn, your insurer can determine what you, as a policyholder, must pay to get coverage, known as a premium.
Whether you’re looking for a car, home, or life insurance policy, insurance agents use various factors to determine how high of a risk you are to insure. Let’s review the aspects that determine risk levels in the insurance industry below:
Car insurance
When it comes to car insurance, an insurance company has a lot to think about before providing you with financial protection. Your auto insurance premiums are often determined by the following:
- Where you live
- Age
- Model, make, and year of vehicle
- Past claims
- Average mileage
- Driving experience
- Driving record
- Insurance history
- Deductible amount(s)
- Regulatory bodies
- How you use your vehicle
In Canada, driving without car insurance is illegal. However, because of the factors listed above, some people might have higher car insurance premiums than others. Even though this is true, being a safe driver and bundling home and auto insurance can help you save money.
Home insurance
Homeowners, condo and tenant insurance premiums also vary depending on the risk factors. For more information, check out home insurance vs. homeowners insurance guide. The previously mentioned aspects include, but aren’t limited to, the following:
- Location
- Weather conditions
- Age and condition of home
- What it costs to rebuild your home
- Claims history
- Whether or not you rent or own your home
- If you have a mortgage
- Type of coverage you have
- Home security systems
- Proximity to emergency services
- Having a pool or hot tub
Buying a home is probably the biggest investment you will make in your life. That’s why you should strive to protect it at all costs. Adding safety features such as home security systems and updating outdated components can lower your risk level and insurance rates.
Business insurance
Running a business is rewarding and risky at the same time. Various factors come into play when calculating business insurance premiums, including:
- Your business type (e.g., products and services)
- Location
- Where you operate
- Amount of experience
- Annual income
- Number of employees
- Alarm system(s)
- Policy chosen
- Claims history
Business can go up and down, and it is often quite unpredictable. That’s why you’ll want to purchase an insurance policy to protect your assets. If you have a physical store, install security cameras and if you're an online store, find a way to protect your website to lower your rates.
Life insurance
Having a life insurance policy is a good precaution to take, but the costs can sometimes vary. Factors that affect life insurance premiums include:
- Age
- Gender
- If you smoke
- Overall health
- Profession and hobbies
- Family medical history
- Driving record
- Criminal history
- Financial problems
- Amount of coverage
As you get older, you become more vulnerable to injuries and illnesses. That’s why you’ll want to purchase a life insurance policy to protect your family if something were to happen. Rates go up and down depending on the type of policy you choose — more on this later.
Health insurance
Health insurance can help you if you fall ill and are unable to work for a long period of time. Here’s what insurers take into account when determining health insurance costs:
- Age
- Gender
- Marital status
- Dependents
- Medical history
- Physical health
- Lifestyle choices
- Where you live
- Type of policy
Having a debilitating illness can stop you from working. That’s why keeping yourself in top shape is essential. Otherwise, you might find yourself paying more for health insurance. Making healthy choices may lower your insurance rates.
Insurance products come with different prices. By understanding how insurance works, you can avoid higher premiums. Shopping around either on your own or with the help of a broker allows you to understand the various risks that insurance companies will cover and how they calculate the costs of a policy. It’s time to get ready to explore the most common types of insurance coverage and what each policy covers.
Types of insurance coverage
There are several types of insurance coverage available. Although they aren’t all mandatory, having them will decrease your risk levels. In turn, you won’t have to pay for all the damages out of pocket if the coverage outlined in your insurance policy does. Here are the most common types of insurance coverage:
Home, condo or tenant insurance
If you own or rent a piece of property, insurance isn’t always mandatory. However, it’s a good idea to have home insurance and follow our home protection tips to avoid the costs of potential damages. Here are some important details you should know about before purchasing a home insurance policy if you don’t have one already. This will also help you if you're changing house insurance providers. Continue reading to learn more:
Sublimit
Homeowners and condo insurance policies limit how much compensation you can receive from your insurance company after you file a claim. The limit depends on the type of insurance claim being made. For example, the maximum amount you would receive for sewer backup damage will not be the same as a roof damaged by a hail storm. You can find your sublimits in your policy documents.
Actual cash value
The actual cash value is the cost of replacing damaged or destroyed property, taking depreciation and obsolescence into account. For example, a ten-year-old couch wouldn’t be replaced at its current full value because of a decade of depreciation. However, items such as antiques or artwork can be appreciated in value over time. In order to receive full coverage for such items, you have to list them specifically on your policy.
Replacement cost
The replacement cost refers to the amount of money required to replace damaged or destroyed property with an item of similar quality without considering depreciation. In the case of a ten-year-old couch, the customer would be compensated based on the cost of purchasing a brand-new couch.
Additional living expenses
Suppose you have to live away from your home because it becomes unlivable as a result of a loss. The amount will include compensation for a hotel room or short-term rental, including meals and other costs associated with living away from home. However, it’s important to note that your policy limits how much compensation you can receive in this scenario.
Auto insurance
In order to drive anywhere in Canada, you need to purchase insurance. Auto insurance will protect you in the event that you get into an accident and damage your property. Let’s explore some of the most common types of car insurance coverage:
Accident benefits and liability coverage
This type of insurance coverage is mandatory for all vehicle owners. Accident benefits and liability insurance coverage will compensate you for any incident involving your vehicle while it is being driven. Coverage applies to medical treatment, income replacement, and other benefits that can help you if you are injured in an accident. It will also help pay for legal fees if someone files a lawsuit against you.
Uninsured automobile coverage
Unfortunately, hit-and-run accidents are on the rise. These occur because people either don’t want to take accountability or don’t have car insurance. If you get into an accident with an uninsured driver or someone drives off after hitting your car, uninsured automobile coverage can help you out. This type of car insurance coverage is mandatory and compensates you if either of these events occurs.
Comprehensive coverage
If your vehicle is damaged as a result of a break-in, flood, water or fire damage and falling objects, comprehensive coverage will protect you. Despite not being required by law, comprehensive coverage can assist you depending on the type of vehicle you drive. However, if you are driving a leased or financed car, you may have to purchase this coverage to protect the car owner or lender’s investment.
Collision coverage
Getting into a car accident can cost a lot of money, especially if you collide with another vehicle or object such as a tree, guard rail or debris. A rollover can also be devastating. If you find yourself in any of these scenarios, you’ll hope that you purchased collision coverage. Having this optional type of auto insurance will compensate you for damages caused by a collision.
Accident forgiveness coverage
Getting into your first at-fault car accident can raise your premiums. On top of that, you will have to pay your deductible before any repairs are completed. Although this type of insurance coverage isn’t mandatory, it can help you out if you end up in this situation. Essentially, this type of coverage will prevent insurance premiums from going up after your accident.
Business insurance
Running a business is often a full-time job, and you shouldn’t lose everything you have worked so hard for. Having business insurance will mitigate the risk associated with running a business and prevent financial losses. Choosing the right insurance policy for your business is essential. Let’s explore the types of coverage available through business insurance:
Property coverage
If your business has a physical location, it is vulnerable to property damage. Having property damage coverage is essential because it ensures that you will be compensated if any of your property is damaged or stolen.
General liability coverage
You will need general liability coverage to protect you from expensive lawsuits. For example, if someone gets hurt while visiting your business, you could be sued. If this happens, general liability insurance can help pay for legal fees, as any damages are your legal responsibility.
Workers’ compensation coverage
If someone gets injured on the job, they are vulnerable to many financial risks. Workers’ compensation insurance can assist with paying for medical expenses and lost wages resulting from a workplace injury.
Business income coverage
What if a natural disaster like a tornado happens, making your storefront unusable? This can cause your business to lose a decent amount of income. If this happens, business income coverage can come to the rescue. It allows you to receive a lump sum cash payment to cover your losses.
Commercial auto coverage
Commercial auto insurance is different from traditional. A separate policy covers fleets of trucks, vans and other vehicles used for business purposes. You cannot claim a business vehicle under your personal car insurance policy. Misrepresentation can lead to higher premiums, which is why multiple auto insurance policies are necessary.
Transit coverage
Most businesses already transport goods from point A to point B. However, goods can be damaged or stolen in transit. That’s where transit coverage comes in. It helps pay for replacement costs if either of these scenarios occurs.
Life insurance
Having a life insurance policy gives your family financial protection if you were to pass away suddenly. There are various types of life insurance available to suit your needs. Here’s what you should know about life insurance:
Term life insurance
Term life insurance is fairly self-explanatory in the sense that its name says it all. It comes into effect if the policyholder dies within a specific period, which is why it’s sometimes called a death benefit. In other words, payment is only accessible in the years that the plan is active. After the term concludes, the policyholder can do one of the following:
- Renew the policy for longer
- Change the policy to permanent coverage
- End the life insurance plan
Permanent life insurance
In contrast, permanent life insurance does not expire. There are two main types of coverage available. Both combine the death benefit with a savings element. These are:
Whole life insurance
This insurance option provides coverage for the duration of your life and allows your savings to grow over time at a guaranteed rate.
Universal life insurance
Things are a little different with this type of life insurance. Unlike its counterparts, the amount of compensation changes based on market fluctuations.
Health insurance
Accidents and critical illnesses are potentially life-altering and can happen at any age. Such events can impact your financial stability. That’s where having health insurance can make a difference. There are multiple types available, which we will get into shortly:
Critical illness insurance
If you receive a life-threatening diagnosis for a serious illness, critical illness insurance can protect you and your family. It will reduce the financial risks associated with being out of work due to being sick. The insurance policy pays out a one-time tax-free benefit payment to the policyholder and covers expenses like basic bills that you can’t afford due to being unable to work.
Coverage will vary depending on your plan. However, on top of mitigating financial losses, your policy might also entitle you to the following:
- Counselling and mental health support services
- Expert medical treatment, including second-opinion consultations and alternative treatment options
- Family support services, including child and home care
- Ongoing nutritional advice for long-term health
Disability insurance
If a serious illness or accident prevents you from working and earning a stable income, you probably need disability insurance. The basic policy aims to replace the majority of your current salary through a tax-free monthly benefit. It helps cover costs that you and your family couldn’t afford otherwise, letting you retain your income until the age of 65 or retirement.
Individual benefits
If you are an independent contractor, business owner, or work in some other way that doesn’t provide insurance coverage, individual benefits can help. This allows you to customize a benefits plan that helps cover costs that are usually covered through workplace benefits plans. These plans can cover dental and vision care, prescription drugs, and life insurance.
Insurance works differently depending on the policy you opt into. Some types of coverage are mandatory, while others are not. Even optional insurance coverage has its upsides. This is because an insured event isn’t guaranteed to be covered under the mandatory portion of your policy. Regardless of the coverage you have, purchasing insurance is beneficial. Let’s explore the reasons next.
Benefits of having an insurance policy
Opting into an insurance policy has many advantages. Whether you have car insurance, home insurance or life insurance, you are taking steps to manage potential risks. With that said, it’s time to explore the benefits of insurance below:
Risk management
Having insurance provides an extra layer of financial protection. Because it protects against unforeseen circumstances, you will be prepared. Whether you get into a car accident, have your home destroyed by a natural disaster, or experience unexpected health issues, insurance will protect you.
Mitigates financial risk
Having insurance helps cover costs associated with the unexpected. It allows policyholders to access funds they wouldn’t otherwise have in times of need, allowing people to recover from these events faster than usual.
Continue running your business
Running a business is stressful yet rewarding, not to mention expensive! That’s why having business insurance comes in handy. It will compensate you for property damage, liability claims and other events while continuing to run and thrive.
Less stress
Insurance can give you peace of mind. This is because it reduces the potential stresses that can be brought on by financial losses. Anything can happen, and insurance ensures you’re prepared for anything, meaning you don’t have to ask, “What if?”
Protect assets
Your home, vehicle and personal property are all valuable assets. Having insurance helps protect these assets in the event that they are damaged for almost any reason. However, you should always review your insurance policy to ensure the incident is considered a covered peril.
Insurance policies can cover everything from bodily injury and medical expenses to property damage. They provide an extra layer of protection and prevent you from having to pay for massive expenses out of pocket. By paying your insurance premiums on top and reviewing your insurance contract before signing, you shouldn’t have any trouble. That said, next, we will review the risks that aren’t covered by insurance.
Risks not covered by insurance
An insurance policy will come into effect when covered perils occur. With that in mind, the basics, like bodily injury and property damage, are almost always covered. However, each insurance policy has terms and conditions. As a result, certain risks are not covered by the insurer. Let’s get into them below:
Intentional damages
Intentionally damaging property to obtain a replacement is considered insurance fraud. Not only will your insurance company not cover this type of damage, but it may lead to your policy being cancelled altogether. Insurance fraud is a criminal offence that comes with hefty fines and, depending on the severity, jail time.
Regular wear and tear
Over time, things like furniture naturally deteriorate. Let’s use a couch as an example. If you have had your couch for over a decade and the leather starts to wear, insurance won’t cover the replacement costs. However, if water damage from a flood damages your personal belongings, your insurance policy may come into effect.
Losses outside your area or term
Certain types of insurance coverage, such as auto insurance, are only valid when you’re in certain areas. For example, your car insurance may only be valid when you’re driving in Canada or the United States. Also, once your policy term ends, your coverage does as well. Be sure to renew your insurance policy or choose a new one to avoid paying for damages out of pocket.
Insurance policies have terms and conditions — that’s why you need to be careful. An insured person should know what’s covered and what’s not to avoid disputes. The appeal process can often be long and drawn out if you believe your claim was unjustifiably denied. You shouldn’t take any chances, so take precautions when filing a claim to avoid issues.
Reach out to BrokerLink to find an insurance company that meets your needs!
Finding an insurance company that offers a policy that suits your needs and budget can be challenging. Calling around and asking for quotes is even more tedious. Essentially, you have to provide several insurance companies with your information before turning all of them down but one. However, having an insurance broker simplifies things because your broker will do all of this for you.
BrokerLink has professional and reliable brokers who understand how to get the job done right. We can help you find the coverage you need at a great price. What are you waiting for? Contact us today to get started.
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