At BrokerLink, when we talk about insurance, we try to avoid the insurance lingo and speak plain English. Unfortunately, there are a few terms we can’t avoid. Two of those terms are
premiums and deductibles. Even though these are two words you’ll hear a lot when it comes to insurance, there is a lot of misunderstanding about what those words really mean. More importantly, people often don’t understand how premiums and deductibles impact their own insurance policies.
That’s where we come in! We’ve created a handy guide that explains everything about premiums and deductibles. Keep reading to understand what these important terms mean.
Basics of premiums and deductibles
Let’s start from the beginning: what do these two terms actually mean?
Definition of premium
Simply put, a premium is the amount paid by the owner of an insurance policy to the insurance company to get insurance coverage.
Example: Becky’s car insurance premium costs $100 per month. Definition of deductible
In the event of a claim, a deductible is the amount of money the customer pays on their own before the insurance company pays the remainder.
Example: Alberto got in a car accident and there was $2000 in damage. He paid his deductible of $500 and the insurance company paid the remaining $1,500. Computation of insurance premiums
Now that you know what an insurance premium is, we can predict your next question: how do insurance companies determine how much my premium is? When insurance companies are calculating the cost of a premium, this is their philosophy: a premium should reasonably reflect the probability in which the insured may suffer a loss and make a claim. In other words, your premium reflects how likely you are to submit a claim. There are strict rules around premiums in Canada, and insurance companies are carefully regulated to ensure their premiums are fair.
There are many factors insurance companies consider to determine how likely you are to submit a claim. Here are a few of those factors:
Car make and model
Year of manufacture
Your driving history
Where you live
Where you live
How big your home is
How you use the property – is it your main residence or vacation home?
How your home is heated
How close you are to water and fire hazards
The electrical and plumbing infrastructure in your home – is it up to date?
The type of business
The type of equipment your business needs
Where your business is located
Quick Question: Does my credit history affect my car insurance premium?
Some people think a low credit history will result in higher car insurance premiums. This is not necessarily the case in Canada. In Ontario and Newfoundland and Labrador, an insurance company cannot allow your credit score to influence your car insurance rates. In Alberta, an insurance company may ask a customer to look at their credit history, but the customer has the right to refuse. Other provinces have varying rules about using your credit history to determine your rate. Talk to an insurance broker in your province to learn more about the rules where you live.
Note that these rules only apply to car insurance. Different rules are in place for other types of insurance.
Payments of insurance premiums
Insurance premiums are typically paid by the customer once a month. However, you may be able to make one payment a year. Depending on the insurance company you’re with, making an annual payment may save you a bit of money. Talk to your insurance broker to see what options are available for you.
Why are there deductibles in the first place?
You might be wondering why you have to pay a deductible at all. Isn’t the whole point of insurance to avoid paying anything if you get in an accident?
Deductibles exist so everyone involved in a claim has some responsibility. They can help ensure everyone is behaving in a safe way and avoiding risk. If everyone involved has something to lose, it’s more likely everyone will behave responsibly to avoid the chance of loss.
Deductibles can also help to keep insurance premiums lower. If there were no deductibles, more people would file claims for minor accidents. This would cause more payouts from insurance companies which might cause everyone’s insurance premiums to go up.
Relationship between insurance premiums and deductibles
Your insurance premium and deductible have a direct relationship with each other. Generally speaking, the higher your deductible is, the lower your insurance premium will be. The logic behind this is since you will pay more out of pocket in the event of a claim, the amount the insurance company will have to pay is lower. As a result, you are able to pay a lower premium.
We know what you might be thinking: increase my deductibles so I can get a lower insurance bill! Not so fast – you should make sure your deductible is something you are realistically able to cover financially if you get in an accident. Take look at your finances and talk to your insurance broker to determine what deductible you can really afford.
Consult with BrokerLink today about insurance premiums and deductibles
If you want to learn more about premiums and deductibles, why not talk to an insurance broker? A broker can answer all your questions and explain the premiums and deductibles that make sense for you. You don’t have to become an expert – you can leave that to us! We are here to explain all the ins and outs of insurance. That includes premiums and deductibles.
Don’t do it alone! Let a BrokerLink insurance advisor help.
FAQs on our guide to insurance premiums and deductibles
When do I pay car insurance deductibles?
You only need to pay a car insurance deductible if you are making a claim. For example, let’s say you’re involved in a car accident and there is $2,000 in damage. If you have a deductible of $500, you will pay that amount. Your insurance company will cover the remaining $1,500.
What happens if I fail to pay my insurance premiums on time?
If you fail to pay your insurance premiums on time, your policy might be cancelled. If you are experiencing financial hardship and don’t think you’ll be able to pay your insurance premium on time, be sure to talk to your insurance broker right away. Your insurance broker may be able to find an option for you so you can avoid a cancellation. Be sure to talk to your broker before it’s too late. Failing to pay your insurance premiums might cause your premium to go up in the future.
Why do insurance premiums change over time?
Insurance premiums depend on many factors. Things like where you live, your driving experience and the type of car you have all affect your premium. As you gain more driving experience, you may see your insurance premium decrease. However, if you move to a new city or neighbourhood, you might see your premium increase! It can be frustrating to see these changes, but they are all based on how likely you are to submit a claim. To understand why your insurance premium is what it is, and to see how you can save, be sure you speak to an insurance broker.