If you own a car in Canada, it is mandatory to buy automobile insurance that covers all or a portion of your damages if you ever meet with an accident. However, insurance is a much broader universe that can be used to protect against a wide range of harmful events that you or your assets may encounter. One of the mistakes that potential insurance buyers make when searching for an insurance policy (especially where said policy is mandatory) is to view insurance as solely a cost. For non-accounting purposes, the concept of insurance can arguably be considered an investment that mitigates your downside. Unfortunate events can happen. That’s just how life works. But with insurance, you have the opportunity to insulate yourself against the worst financial consequences.
There are also other reasons to buy insurance, particularly life insurance. Although the loss of a loved one can never be replaced, purchasing life insurance can ensure that your family does not experience significant financial hardships if something were to happen to you. As such, insurance can be used to protect your family’s immediate economic future. On a smaller scale, if you encounter a car crash or water damage that renders your vehicle or home incapable of use, insurance can ensure that you do not have to spend an excessive amount out of your pocket to get it fixed.
How Does Insurance Work?
The concept of insurance is pretty simple to understand. Each month (or year), you pay a fixed fee (called a premium) to insure the person or asset you wish to cover. Then, if an unfortunate event occurs, the insurer (i.e., the person you bought the insurance from) pays for all or a portion of the damages incurred to the person or object. In essence, insurance is the process of ‘risk transfer.’ By paying a small fee, you transfer the financial risk of uncertainty to the insurance company.
Different Types of Insurance
For this section, we will focus on the personal insurance needs of consumers and the commercial insurance needs of small business owners. Some of the main types of private insurance that individuals will likely need and/or use at some point in their lives include the following:
Life insurance is essentially a bilateral contract between a person and the insurance company that states that in exchange for premiums paid, the insurance company will pay out a lump sum (called a death benefit) to stated beneficiaries (who are most likely the person’s dependents) after their death. There is usually no restriction on how to spend the proceeds of the death benefit. The money can be used for day-to-day expenses such as the maintenance of the house, post-secondary education, paying off a mortgage, or any other purpose as the beneficiary deems fit. In general, there are two types of life insurance. Permanent life insurance provides lifetime coverage, while term life insurance provides coverage for a certain period of the insured person’s lifetime.
Although we enjoy the benefits of public health insurance in Canada, certain aspects of the healthcare system are not covered by each province’s insurance plan, such as dental and vision insurance. For these costs, private insurance can step in to ensure that individuals do not have to pay large sums out of pocket to obtain critical services. Most full-time employees of a company will have a benefits package that includes health insurance coverage. However, if you are an entrepreneur or not covered by your employer, then private health insurance may be worth looking into for your and your family’s safety.
As the name implies, auto insurance (also called car insurance) protects the insured person against the financial loss of their car resulting from an accident, collision, theft, or vandalism. In Canada, driving without insurance is illegal (not to mention dangerous!) and can incur significant penalties if caught by the police. Auto insurance covers physical damage or bodily injury for all types of vehicles. Depending on the policy obtained, it may cover all or some of the damages. In addition, the type of policy purchased also impacts whether a payout is made in instances of reckless driving or whether it would be exclusively for an accident.
Homeowners face a multitude of risks to their property. In the case of any damages to the home, the insurance company will help pay a portion of the damages, thus enabling the homeowner to recoup some of the losses they incur. However, every homeowner insurance policy comes with a set limit. This puts a hard cap on the coverage that the homeowner can expect to receive if or when an unfortunate event occurs. Most homeowner insurance policies cover four major kinds of incidents on the property: interior damage, loss/damage of personal belongings, exterior damage, and injury on the property. Acts of God (earthquakes, cyclones, floods, etc.) are typically excluded from these policies. If a homeowner owns a property in a geographic area prone to natural disasters, they may have to obtain special coverage on top of homeowner insurance.
Tenant insurance (also known as renter’s insurance) is primarily used by tenants of rented properties to insure their personal belongings in the event of an incident like fire or theft on the property they are renting. Depending on the type of policy obtained, this may cover the repair or replacement of belongings, costs of temporary relocation while repairs are made, and liability to the tenant if a guest injures themselves on the property and files a lawsuit against the tenant. While tenant insurance is not mandatory in most provinces, many landlords require tenants to obtain tenant insurance before renting the property to them.
For individuals with pets, pet insurance can be a worthwhile purchase that can help offset some of the costs of veterinarian fees for medical treatments (particularly emergency treatments). In general, there are two types of pet insurance plans available. A wellness plan covers general health and maintenance, such as routine visits to the veterinarian and shots. A health insurance plan can be customized according to the pet’s needs and owners’ preferences and is much more comprehensive of diseases and major surgeries that an injured or sick pet may need.
A vacation is intended to help you relax and detach from the pressures of everyday life. However, even while travelling, individuals can face certain risks. The losses can range from minor instances such as a lost suitcase to more significant issues such as trip cancellations or a medical emergency while abroad. Most travel insurance policies will have a set of named perils within the document that stipulate the exact types of events covered if they materialize. Anything outside of this scope would not be covered.
Small Business Insurance
While the insurance types listed above are all examples of personal insurance used by individuals, small business insurance is a type of commercial insurance that protects a business’s assets or income. Most small business owners with companies ranging from 1 to 100 employees will use a Business Owners’ Policy (BOP). This BOP typically includes coverage of business property, general liability, and business interruption.
In the event of fire, theft, or other such events, business property coverage helps reimburse some or all of the damages to specific buildings and properties owned by the business. It can also cover the cost of replacing lost or damaged fixtures and capital equipment inside the building, such as computers, furniture, and machinery.
General liability coverage can help pay for medical expenses or legal costs incurred by a business if a person is injured on site and the company is found to be liable. Lastly, business interruption coverage helps offset lost income or additional expenses incurred when a business has to temporarily shut down due to an unforeseen event. Although these events are generally stipulated right at the onset of the insurance contract as ‘covered perils’. Any event outside of these covered perils that cause businesses to shut down is not eligible for business interruption coverage.
How to Read Insurance Documents and Policies
Insurance documents may often be arcane and complex to someone who is not from the industry. Therefore, it is important to read policy documents carefully to ensure that you know what you are signing and avoid facing any unpleasant surprises later.
Generally, four sections are consistent in every insurance policy:
The declaration consists of sections such as the scope of coverage (i.e., which risks are insured), the policy limits, premiums due in each period, and a list of endorsements that add to or change the policy. Note that an insurance endorsement (also called a rider) is an amendment to an existing contract that modifies the terms of the existing policy.
This part of the policy will cover the description of the property or asset in question, what losses will be covered, and the criteria that need to be met or circumstances under which the insurance company will pay out proceeds to the insured party.
These are statutory conditions that must be complied with in all circumstances. If these conditions are not accurately fulfilled, the policy may become void, giving the insurer the right to decline a claim. As an insured party, it is in your best interests to ensure that all conditions are met on time and as agreed upon in the policy document.
This section will list specific perils or property that may be excluded from the coverage. An example of an exclusion would be an Act of God (such as an earthquake).
When buying life insurance, make sure you are comparing apples to apples. A whole life insurance policy will have a substantially different pricing structure than a term life insurance policy. However, depending on your circumstances and preferences, you may want to choose one over the other.
A term insurance policy offers coverage for a fixed period (typically between 10 – 30 years). Buyers of term insurance policies often get these policies to support their dependents in case of an adverse event. That way, if the insured person passes away, their dependents can use the proceeds to pay down the mortgage and afford college tuition, etc.