Understanding the different types of insurance

 

Key takeaways

• Insurance provides financial compensation in the event of an accident or unexpected event.  
• Several factors can influence the premium amount and type of coverage. 
• It’s important to read the policy to understand the coverage amount, deductibles, risks covered, terms and conditions, and exclusions. 
• In certain situations, it may be mandatory to purchase insurance. 

How does an insurance policy work?

Insurance is a written contract (the policy) between you and an insurance company. In exchange for coverage, you agree to pay the company a certain amount (the premium) on a regular basis or as a lump sum. In the event of an accident or unexpected event covered by your policy, the insurance company will pay you a sum of money as compensation (a benefit).

How is the premium determined?

Each type of insurance has its own specific characteristics, and the cost of a premium can vary depending on many factors. 

For example

• A home insurance premium is calculated based on factors such as the size and location of your home, as well as the value of your belongings.  
• For auto insurance, the premium depends, among other things, on the model and value of the vehicle.  
• For life insurance, the premium is determined based on your age, overall health and medical history, in addition to the amount of coverage you want. 

All of these factors allow the insurance company to assess the risks involved – that is, the likelihood that an event will occur while your policy is in effect. The amount of your premium is determined based on these risks, and you’ll be informed of the factors that influenced it. 

What does an insurance policy cover?

To be eligible for insurance, you must meet certain requirements. Your policy is a legal document that lists these requirements, provides details about your coverage and serves as proof of the agreement you’ve entered into with your insurance company. 

An insurance policy specifies, among other things: 

• The risks covered 
• The exclusions 
• The conditions for receiving a payment in the event of a claim 
• The amounts or percentages you’ll receive in the event of a claim  

Take the time to read your insurance policy to learn what is and isn’t covered, the maximum coverage amount and whether you have a deductible to pay. It’s your responsibility to fully understand the terms of your policy. When shopping for insurance, don’t hesitate to ask questions so you can make an informed decision.

A brief insurance glossary

This non-exhaustive glossary of key insurance industry terms will help you make sense of the subject and better understand your policy. 

Generic terms

Beneficiary 
A beneficiary is the person designated to receive the benefit payable under an insurance policy – that is, the person who’ll receive the amount specified in the policy. 

Compensation 
The amount of money the insurance company will pay you to compensate for a loss or damage. 

Deductible 
Some insurance policies require you to pay a certain amount in the event of a claim. This is called a deductible. You can usually choose the amount of the deductible. The higher it is, the lower your premiums. Deductibles are most commonly used for auto and home insurance, but can also apply to travel insurance. 

Exclusion
An insurance policy may specify certain situations in which a person or property will not be covered. In the case of property insurance, coverage excludes normal wear and tear on property. For example, if your refrigerator reaches the end of its useful life, you won’t be able to file a claim. For personal insurance, coverage generally excludes situations involving intentional risk-taking. For example, if you go skydiving, you can’t receive compensation for any injuries sustained.  

Guarantor 
A person who confirms you can fulfill your obligations and who agrees to assume your financial responsibilities if you fail to do so. 

Premium 
The amount paid for insurance coverage. Premiums are based on the level of risk and may be adjusted if circumstances change or when the policy is renewed. 

Rider
This is a clause used to amend certain terms or conditions of an insurance contract. In other words, it’s a document that supplements the basic contract. 

Property insurance terms

Civil liability 
The legal responsibility for damage or injury unintentionally caused to another person or their property. For example, if your refrigerator leaks and damages your neighbour’s ceiling, your home insurance may cover the resulting damage. 

Declarations page 
This section of a property and casualty insurance policy contains key information such as the name and address of the insured, the insured property, the term of the policy, the amount insured, the premiums to be paid, etc. 

Direct damage 
This type of damage results directly from an unexpected event. For example, a household appliance that breaks down as a result of water damage.

Indirect damage 
This type of damage results indirectly from an unexpected event. For example, if a refrigerator stops working due to water damage, the food inside it could become unfit for consumption. The loss of this food is indirect damage caused by the water damage.

Quote  
This is the policy proposal offered to you by the insurance company. It details the amount of your premium based on your personal circumstances, the type of coverage and the deductible amount you’ve chosen. If you accept the quote, the company will then issue your insurance policy. 

Personal insurance terms 

Insurance application   
This is the form you must complete to apply for coverage with the insurance company. It includes the type of coverage offered, information about your personal circumstances and any risk factors you need to disclose. The contract is finalized once the insurance company accepts this application. 

What are your insurance needs?

There are various types of insurance on the market. To choose the products that best meet your needs, take the time to do your research. Here’s an overview of the types of coverage you might want to consider: 

Home insurance

If you’re a homeowner, you should purchase home insurance to cover the value of your home and belongings in the event of damage. Policies may vary depending on certain factors. For example, the type of property, whether or not you live there, whether it’s a primary or secondary residence and so on.

Renters can also benefit from home insurance.

It provides compensation if your belongings are stolen or damaged, and can cover living expenses if a disaster such as water damage or a fire leaves your home uninhabitable. 

Home insurance also includes liability coverage for accidental damage you cause to others. For example, if you accidentally start a fire while cooking and it damages your apartment as well as neighbouring units, your policy may help cover the resulting costs.

Depending on your coverage, this may include additional living expenses, repairs to your property and your neighbours’ property, and damage to the building.

Auto insurance

In Canada, auto insurance is mandatory if you own a vehicle. Depending on your province or territory, you might be covered by a public plan, need to purchase private insurance or rely on a combination of both. 

Here is the required coverage:  

• Civil liability: Covers property damage or bodily injury caused to others. Depending on your province or territory, the minimum required coverage ranges from $50,000 to $500,000. This coverage may be provided by your public insurance plan. 
• Accident benefits: Provides compensation for bodily injuries that you or your passengers may sustain, regardless of what caused the accident. This coverage may be provided by your public insurance plan. 

 In addition to this basic coverage, you can add optional coverage: 

• Collision insurance: Covers damage to your vehicle caused by an accident, regardless of who’s at fault (for example, in the case of a hit-and-run). 
• Comprehensive insurance (excluding collision): Covers the theft of your car or damage due to fire, vandalism, severe weather, etc. 

Travel insurance

It’s always a good idea to purchase travel insurance before leaving for your trip. Some countries may require this type of coverage for entry or to work or study abroad. 

Travel insurance generally covers emergency medical care, but it also offers other types of coverage. For example, you may receive compensation in the following situations:

• Flight delay or cancellation
• Trip cancellation or interruption 
• Accidental death or dismemberment
• Loss or theft of luggage

Life insurance

Taking out life insurance is a way to give your loved ones financial security. Upon your death, the people you’ve designated as beneficiaries will receive the insurance amount you purchased. This money could help them cover the cost of your funeral, but it could also serve as an inheritance.

Mortgage insurance

Buying a home is often the largest purchase you’ll ever make. That’s why it’s a good idea to insure your mortgage. With this type of protection, your payments will be covered in the event of a critical illness, disability or death. Instead of worrying about money, you could focus on your health and avoid leaving this debt to your loved ones. 

Take the time to do your research and compare the various mortgage insurance products on the market. 

Personal loan and line of credit insurance

This kind of policy will cover the balance or part of your loan in the event of your death, a disability or the diagnosis of a critical illness. It will ensure that your loans don’t become a burden for you or your loved ones.

Check with your insurance company to learn which types of loans and lines of credit you can insure. 

Credit card payment protection

This coverage pays off part or all of your credit card balance in the event of your death, a critical illness, a disability or an involuntary job loss. It’s an extra safety net. 

When choosing credit card payment insurance,  be sure to review the covered events, benefit amounts and other policy terms before making a decision. 

No matter what type of insurance you’re looking for, the first step is to identify your needs and do your research. After that, an insurance specialist can help you choose the right policy for you.

See our insurance options and get a quote.