Understanding insurance in its most basic form is the first step. Whether you’re purchasing your first car insurance policy or need to buy an insurance policy for your business, you need to have a firm grasp of the concept and purpose of insurance in order to purchase the best possible policy for your needs. To give you a better idea of what insurance is and how it works, keep reading.
Insurance defined
Insurance is a contract between the insurer and the insured. When this contract is signed, the insured agrees to pay a premium, typically in the form of a monthly or yearly payment, in exchange for insurance coverage provided by the insurer. This coverage varies depending on the type of insurance contract you are purchasing, whether it be a life insurance policy, business insurance policy, home insurance policy, or car insurance policy. However, the details of the coverage and each party’s responsibilities will be clearly outlined in the insurance contract.
Once both parties have signed the contract and it has taken effect, the insured, also known as the policyholder for insurance, will be covered until the term policy ends or the policy is cancelled, whichever comes first. Both the insurance company and the policyholder have the right to cancel the policy under specific circumstances. However, if the policyholder decides to cancel the policy before the term expiry date, then they may be required to pay a cancellation fee. Insurance can also cancel your policy on certain grounds, such as non-payment or fraud. Please note that most policy terms are one year, though they can vary.
If an incident occurs during your policy term, such as if you get into a car accident or your home is damaged in a fire, you will file a claim with your insurance provider to receive a payout. The payout you receive will help you cover the cost of the accident, whether that means paying to repair your car after it’s damaged in a collision or paying to rebuild your home or roof after it’s damaged in a house fire.
It is important to note that the risks that you are covered by your insurance company will be clearly outlined in your policy. Any damage or losses that occur outside the scope of your coverage will not be covered by your insurance company. You will need to pay for these out of pocket. This is why it’s so important to check your policy thoroughly. This way, you will know exactly what you are and are not covered for.
In addition, if you are covered for a specific incident and you receive a payout from your insurance company, the payout you receive will be minus your policy deductible and only up to your policy limit. We cover policy deductibles and limits in insurance in greater detail later on.
Why does insurance coverage matter?
Insurance coverage is important for several reasons. First and foremost, it offers financial protection. This is the reason that most people choose to buy insurance policies. With a policy, you can rest easy knowing that if the worst-case scenario occurs, your insurance company will step in and help cover the costs instead of you having to pay for them out of pocket. Whether your pet gets sick, you get into a car accident, a customer sues your business, or a fire breaks out in your home, there is an insurance policy that can protect you. At the end of the day, a few of the main benefits of insurance are stability, security, and protection.
Insurance terms to know
In order to have a better understanding of how insurance works and your specific insurance policy, you should know the following terms:
- Insurer: An insurer is the insurance company that is providing you with coverage
- Policyholder: The person named on the insurance policy
- Policy limit: The maximum amount of money that an insurance company will pay out in the event of a claim
- Premium: The amount of money that the policyholder agrees to pay to the insurance company in exchange for their coverage
- Term The length of time that the insurance policy is valid
- Deductible: The amount of money that the policyholder is responsible for paying out of pocket before the insurance company will issue a payout
- Claim: An official request that the policyholder makes to the insurance company to cover the cost of an incident
The four components of an insurance policy
Below, we dive deeper into the four main components of an insurance policy:
Insurance premiums
An insurance premium is a fancy term for the amount of money that a policyholder owes an insurance company in exchange for their policy. In other words, to be covered for the risks outlined in your policy, you need to pay a certain amount of money to your insurance company. Insurance premiums vary between policyholders, but your insurance company will set your premium before you purchase your policy so that you will know exactly how much it will cost. If you proceed with buying the policy, you will need to select a payment plan. Most payment plans for insurance premiums are paid monthly or yearly. The policyholder can make one lump sum payment or choose to pay the total premium in smaller increments each month.
How insurance companies calculate premiums differs. Each insurer has its own risk-calculation formula that takes into account a wide range of factors. A few factors that come into play for different types of insurance policies can be found below:
Factors impacting auto insurance premiums
- Where you live
- Age
- Gender
- Vehicle type
- How you use your vehicle
- Driving record
- Driving experience
- Past claims
- Prior insurance coverage
- Number of kilometres you drive
- Type of coverage on your policy
- Your deductible(s)
Factors impacting home insurance premiums
- How valuable your home is
- How safe and desirable your neighbourhood is
- How close your home is located to emergency services
- The materials, age, and condition of the roof on your home
- The type, age, and condition of the heating system that your home uses, older systems like oil tanks or wood stoves, may lead to higher premiums
- The type, age, and condition of the electrical system in your home
- The type, age, and condition of the plumbing system in your home
- Whether your home is equipped with a security system, and if so, what type of system is it equipped with
- If there are any additional or detached structures on your property that need to be insured
- Type of coverage on your policy
- Your deductible(s)
- Your claims history
Factors impacting commercial business insurance premiums
- Your years of experience in the industry
- The size and location of your business
- The annual and projected gross revenue of your business
- The number of employees at your business
- Your insurance claims history
- The products or services offered by your business
- The coverages, limits, and deductibles you select for your commercial insurance policy
- Whether your business operates online, in-store, or both
If you want to know how much your insurance premium will be, reach out to BrokerLink today. BrokerLink offers free business insurance, car insurance, and home insurance quotes to all customers with no strings attached.
Insurance policy limit
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.
The good news is that you can make changes to a car insurance policy or any type of policy, including modifying your coverage limits. So, if you decide that you want to raise your coverage limit down the road, you can do so by contacting an insurance agent or broker.
It is also important to note that policies with higher coverage limits are usually more expensive than those with lower coverage limits.
Insurance policy deductibles
Another component of an insurance policy that you need to know about is insurance policy deductibles. When you receive an insurance reimbursement after you file a claim, your deductible 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. Nearly all types of claims are subject to a deductible. The good news is that the policyholder gets to select a unique deductible for each type of coverage on the policy. This allows you to choose a higher deductible for one type of coverage and a lower deductible for another if you wish to do so.
Deductible amounts can range widely. For example, car insurance deductibles can range from $200 to $2,000. An important rule of thumb to remember is that the higher your deductible, the cheaper your premium, and vice versa. The reason that policies with low deductibles are more expensive is that the policyholder agrees to take on less financial responsibility in the event of a claim. This puts more of the responsibility on the insurance company, and they will charge customers more for this. If you want to pay less money upfront for your insurance policy, consider choosing a higher deductible if you can afford one. To help select the right deductibles for your lifestyle and budget, get in touch with BrokerLink today. One of our insurance advisors would be happy to offer a professional opinion on the right deductibles for your plan.
Insurance coverage
The final component of insurance policies is the insurance coverage. Insurance coverage is the specific risks that you are covered for as the policyholder. For example, dwelling coverage is a type of home insurance coverage that compensates policyholders for damage to the physical structure of their homes. Your policy will include a detailed description of each type of coverage included, as well as the exclusions and limitations of the coverage you selected. This will give you a clear idea of exactly what risks are and are not covered. Since most types of insurance are not legally required in Canada, it is up to you to decide what types to include on your policy. If you find this task a bit daunting, don’t hesitate to ask a BrokerLink insurance advisor for help. One of our advisors can offer advice on what types of coverage make the most sense for your needs.
How to file a claim with your insurance company
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. Below, we outline the general process of filing a claim with your insurance company:
1. Contact your insurance company following the incident
First, you must contact your insurance company to inform them about the incident. The easiest way to do this is over the phone. Whether you got into a car accident or a burglar broke into your home, you should inform your insurance provider as soon as possible. From there, they will give you clear instructions on how to file a claim. Nowadays, you can likely file a claim online. Since each insurance company has its own unique claims process, it’s important to listen closely when your insurer explains this to you. This is also a great opportunity to ask any questions you may have.
2. Gather the necessary evidence
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.
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. Wait to receive confirmation that your claim has been submitted.
4. An adjuster will investigate your insurance claim
After your insurance claim is officially submitted, your insurance company will assign an 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. Get compensated by your insurance company
When the insurance company has reached a decision, they 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.
Types of insurance
In order to understand what insurance is, you should have a handle on the different types of insurance policies out there. From health insurance to car insurance, we offer a brief description of some of the most popular types of insurance policies available in Canada and around the world:
Health insurance
Health insurance is an important type of insurance that is designed to cover medical care costs that are not covered by basic healthcare in Canada. Such costs may include prescription medications, physical therapy, mental health therapy, cosmetic procedures, and more. In addition, many health insurance plans also include vision and dental coverage.
Home insurance
Home insurance, which is also known as homeowners insurance and property insurance, is a type of insurance that is designed to protect a person’s home from damage. There are policies for both homeowners and those who rent their homes. Either way, the coverage you purchase can safeguard your home against property damage due to a wide range of perils, like fire, theft, lightning, smoke, and more. Basic homeowners insurance policies also include personal liability coverage, which covers policyholders against third-party claims alleging bodily injury and property damage, as well as contents coverage, which protects policyholders against damage or losses relating to their personal belongings.
Car insurance
Car insurance is mandatory for all drivers across Canada. This means that if you want to get behind the wheel, you will need to purchase an auto insurance policy. With the right policy, you can be protected against both no-fault and at-fault collisions, including any property damage or bodily injury that stems from them, as well as vehicle theft. Whether your car needs to be repaired or replaced after an accident, you can file a car insurance claim and receive a payout. If your car is totalled and you agree to take a settlement, you can use that settlement to buy a new car. Find out more about whether car insurance settlements are taxable here.
Life insurance
Life insurance is unique in that the policyholder agrees to pay a premium to an insurance company in exchange for the insurance company issuing a tax-free payout to a beneficiary of the policyholder’s choice upon their death. The two main types of life insurance are term life insurance and whole life insurance, with the latter typically being more expensive than the former. Please note that all life insurance policies should contain a beneficiary. If no beneficiary is chosen, the money will be paid out to the policyholder's estate upon their death and it will be taxed.
Business insurance
Business insurance, which is also referred to as commercial insurance, is designed to protect businesses of all sizes from the risks they face. For example, a basic commercial insurance policy can protect your business against third-party liability claims alleging bodily injury and protect your place of business from property damage. There are tons of different coverages that businesses can add to their policies, such as commercial liability coverage, professional liability coverage, product liability coverage, cyber liability coverage, umbrella insurance, crime insurance, commercial property insurance, and more.
Travel insurance
Travel insurance is another popular type of insurance. Travel insurance can pay for various losses or costs associated with travel, such as trip cancellations or delays, damaged baggage, rental car insurance, or coverage for emergency medical care and evacuations during your trip. Please note that even the most comprehensive policies may not offer travel coverage relating to weather, terrorism, or a pandemic.
A few other types of insurance that are worth knowing about include:
- Legal insurance
- Disability insurance
- Accident insurance
- Pet insurance
- Critical illness insurance
- Indemnity insurance
- Dental insurance
- Vision insurance
Contact BrokerLink for more insurance information
If you want to learn more about any type of insurance, reach out to BrokerLink today. We can help you find a policy, give you tips on how to save money on your coverage, and explain complex industry terms, such as reinsurance and double insurance.
Get in touch with BrokerLink to request your free insurance quote today.
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