How does insurance work?
Insurance is a contract (policy) between you and an insurance company. When you buy insurance, you pay a sum of money (a premium) to an insurer regularly or in a lump sum. In the event of an accident or unforeseen event, the insurance company will pay you a certain amount of money.
Each type of insurance has its distinctive features, and the exact cost of the premium is determined by various factors.
For example:
- The insurance premium for a house or condo is calculated based on the surface area, location, and value of the property.
- For car insurance, the premium depends on the model and year of the vehicle, among other things.
- For life insurance, your age and medical history will be taken into account when determining the premium.
These factors allow the insurance company to assess the risks involved, i.e., the probability that an event for which you’re insured will occur while your policy is in force. The insurer will take these risks into account when determining your premium.
Good to know: Depending on your province of residence, your credit rating may be taken into account when calculating the premium for certain types of insurance. If your credit score is poor, this could have an impact on how much you pay.
There are also certain conditions that companies and individuals need
to meet. These are generally specified in the terms and conditions of
your insurance policy.
Understanding your insurance policy
Your insurance policy is a legal document listing the conditions of your agreement with an insurance company. It certifies the agreement between you and the insurer.
An insurance policy must specify:
- The risks that are covered
- The circumstances under which you’ll receive payment in the event of a claim
- The amount or percentage you’ll receive in the event of a claim
Take the time to read your insurance policy to find out what is and isn’t covered, the maximum coverage amount, and whether you have to pay a deductible. It’s your responsibility to understand the terms, and conditions of your policy, so when you’re shopping around for insurance, don’t be afraid to ask questions.
Insurance glossary
To help you make sense of your policy, here are some of the key terms used in the insurance industry.
Beneficiary
A beneficiary is the person who benefits from a life insurance policy, i.e., the person who will receive the amount specified in the insurance policy.
Civil liability
This refers to an insured person’s liability to third parties for damage they cause unintentionally. For example, if your refrigerator leaks and damages the ceiling of the apartment below you, that damage could be covered by your home insurance.
Declaration page
This section of an insurance contract sums up the policy and contains all essential information such as the name and address of the person insured, the property insured, the duration of the contract, the coverage amount, premiums, and so on.
Deductible
Many types of insurance, such as for your car or home, stipulate that you still have to pay a certain amount in the event of a claim. This is known as the deductible. You can generally choose the amount of your deductible; however, keep in mind that the higher the deductible, the lower the premium.
Direct damage
Damage that results directly from an unforeseen event, such as an appliance breaking down due to water damage from a broken pipe.
Endorsement
This is a clause used to modify certain terms and conditions of an insurance contract. An endorsement is an add-on to the main contract.
Exclusions
An insurance contract can stipulate that certain types of damage aren’t covered. For example, normal wear and tear on a refrigerator is excluded from insurance coverage.
Guarantor
A person who can confirm you’ll be able to fulfill your commitments and who agrees to assume your liabilities if necessary.
Indirect damage
Damage that results indirectly from an unforeseen event. For example, if food spoils inside a refrigerator that no longer functions due to water damage. This loss of food falls under indirect damage since it was a result of the water leak.
Omnibus clause
A common feature of car insurance contracts, this clause covers damage caused by someone who was borrowing your car.
Premium
The premium is the amount you have to pay the insurance company for the coverage you purchase. It can be modified when a policy is renewed, depending on any changes in risk.
Quote
The amount your insurance will cost and the premium you’ll have to pay based on the type of coverage you choose, the amount of your deductible, and your situation. If you accept the insurance company’s quote, they will then issue you the insurance policy.
Secondary beneficiary
This is the person or people who benefit from the life insurance policy in the event of the beneficiary’s death.
Subrogation
When an insurance company acts on behalf of the insured to pursue legal action against a third party who caused damage to the insured’s property.
Tertiary beneficiary
A tertiary beneficiary is the person who’s third in line to receive life insurance benefits. In the event of the first two beneficiaries’ death, this person receives the benefits.
What type of insurance do I need?
Various types of insurance are available on the market. It’s important to ask questions to understand each one and clarify any misconceptions. Here’s what you need to know to make informed decisions.
Home insurance
If you’re a homeowner, insurance will cover your property and belongings. Policies will differ based on certain factors, such as whether or not you’re an occupant, if the property is a condo, a second home, etc.
Although not compulsory for renters, home insurance is recommended. It will cover your possessions if they’re stolen or damaged as well as living expenses following an unforeseen event, e.g., a leak or fire.
It also offers civil liability coverage if you cause damage to others unintentionally. This means, for example, that if you forget a pan on the stove and it starts a fire in your home that spreads to your neighbour’s home, your insurance will replace your furniture, pay for accommodation while repairs are being made, and also cover the cost of repairs to your neighbour’s property.
Good to know: Don’t think your possessions are worth enough to justify insurance? Would you be able to buy everything back should an unexpected event occur? Whether or not your possessions are heirlooms, home insurance is always useful for a tenant.
To find out more about home insurance, check out our article:
→
How and why to take out home insurance.
Car insurance
In Canada, car insurance is mandatory for anyone who owns a vehicle.
In Quebec, for example, all vehicle owners are required to have at least $50,000 in civil liability coverage.
Your car insurance can include coverage for damage that you’re responsible for, damage caused by a third party, and risks such as fire, theft, vandalism, etc. Endorsements can be added to your contract to protect you against additional risks, for example, an accident with a rented or borrowed vehicle.
Depending on your province or territory of residence, your insurance may also include:
- Accident benefits: Benefits that cover bodily injuries sustained in a car accident, regardless of who caused it.
- Mandatory coverage: This covers damage to your vehicle if you’re not at fault for the accident.
- Optional coverage (collision or comprehensive): This covers damage to your vehicle if you’re at fault for the accident.
- Uninsured motorist coverage: This covers medical expenses and damages when an uninsured person is at fault.
Travel insurance
It’s always a good idea to take out travel insurance before you go away. It may even be mandatory if you’re travelling to certain countries or if you’re going to work or study abroad.
Travel insurance generally covers emergency medical care and expenses such as flight cancellations or delays, trip interruptions, damage, loss or theft of baggage, and even accidental death or dismemberment.
Good to know: Before purchasing travel insurance, check to see if your credit card company already provides coverage. Some cards include travel and rental car insurance. Plus, there are other advantages to using your credit card when travelling – you could earn points or avoid foreign currency conversion fees.
To learn more about travel insurance, check out our article:
→
Why should you get travel insurance?
Life insurance
Life insurance provides financial security for your loved ones. In the event of your death, the people you’ve named as beneficiaries will receive a life insurance payout. This money can not only be used to help cover your funeral expenses, but it can also help fund your children’s education, for example.
Good to know: You may be required to take out group life insurance with your employer. However, you should check that the coverage meets your needs and take out additional coverage if necessary.
There are many types of life insurance. To find the one that’s right
for you, check out our article:
→
Why take out life insurance?
Mortgage loan insurance
Since buying property is usually the biggest expense you’ll incur in your lifetime, it’s a good idea to insure your mortgage. Mortgage loan insurance covers your payments in the event of serious illness, disability, or death. This will allow you to concentrate on your health or avoid passing on debts to your loved ones.
Take the time to research and compare the different mortgage insurance products on the market.
Loan and line of credit insurance
Loan and line of credit insurance protects you in the event of death, disability, or serious illness. The insurance will cover the loan balance or a portion of your payments. This means your loans will never become a burden to you or your loved ones.
Check with your insurance company to see what types of loans and lines of credit are eligible for coverage.
Credit card payment insurance
Credit card payment insurance covers all or part of your credit card balance. This type of insurance can help shield you or your loved ones from financial obligations related to your borrowing in the event of death, serious illness, disability, or job loss.
When shopping around for credit card payment insurance, make sure to check what circumstances are covered, as well as the terms and coverage amount of the policy.
Whatever type of insurance you’re looking for, it’s important to know your needs and stay well informed. For anything you may be unclear on, ask an insurance specialist so they can help you find the best policy for you.
Would you like to discuss this with us? Contact your National Bank advisor or your wealth advisor at National Bank Financial. Don't have an advisor?
