In insurance contract, being both under-insured or over-insured can have their downfalls. Under-insured drivers face the r1sk of getting into an acc!dent and not having enough to cover the vehicle damage, and personal injur1es to themselves and others involved. Over-insured drivers are just plain paying too much out of their pocket, therefore, wasting unnecessary cash. If you want to avoid this trap, please read on.
First and foremost, what is
insurance?
Insurance is a tool to reduce financial loss or hardship. It is a contract between the insured and an insurance provider under which the insured can be paid for certain losses. The insurance provider pools clients’ r1sks to make payments affordable for the insured
(Investopedia).
It is protection that can help cover the cost of unexpected events such as theft, illness, property damage, or d,eath. The protection or coverage you receive can be for a limited period of time or throughout your lifetime. In return for the protection, you pay a premium. Premiums are the amount you pay periodically, depending on the type of insurance and what is stated in your policy. The amount of premiums you pay are based on the probability that you will suffer a claimable loss. Other factors that are considered in computing premiums can be the insured’s age, health, lifestyle or family history.
For health, dental, home, and auto insurance policies, the amount of premiums also depends on the deductible. This is the amount of your claim you agree to pay before the insurer pays the rest. Of course, choosing a higher deductible will lessen your premiums because you are agreeing to pay for a larger part of your loss.
How does insurance work?
When people buy insurance, they put their money into a pool with many others. Some of that pool of money helps the policyholders who suffer a hardship in that period. The hardship can be home, auto or business losses. You are covered only for losses written in your contract, not for predictable events.
When a hardship or loss occurs, a claim is made. This is an official request for the insurer to pay for a covered loss. The insured’s agent or broker can assist in claiming benefits. Supporting documents will be required, depending on the type of loss (for example, photographs of an in,jury or property damage for an accident or property insurance claim, or a de,ath certificate for a life insurance claim) during claims processing or claims investigation.
Different types of insurance
Life insurance
Life insurance provides payment to the insured’s family and loved ones after the insured’s d,eath. The insured names a person or persons (beneficiary/beneficiaries) who will receive the d,eath benefit as stated in the policy. The proceeds or death benefit are tax-free.
There are two types of life insurance:
Term –provides coverage for a specific amount of time. If the insured d,ies within the period of coverage (and the premiums are paid), the beneficiary receives the death benefit as stated in the policy. The coverage ends at the specified term. It can be renewed after the term, however, the premium may increase since premiums may depend on the insured’s age.
Permanent – it covers the insured throughout their lifetime (unless the insured fails to pay the premiums). There are two kinds:
Whole life insurance – this guarantees that your premiums will not change as you get older. This type of insurance has a guaranteed minimum cash value and de,ath benefit amount.
Universal life insurance – this is a product combining life insurance and investment.
Health insurance
Health insurance can help you pay for services that the provincial health care plan does not cover. Some types can supplement your income if you suffer a major illness or inju,ry. Other types can pay for medical expenses if you become ill while on vacation.
Here are some types of health insurance:
Supplementary health insurance
D1sability insurance
Travel medical insurance
Critical illness or trauma insurance
Long term care insurance
Read Do I need supplementary health insurance? to know more.
Property and Casualty (General) Insurance
Property insurance covers losses or damage to your home or personal possessions, to your car, or your business. Casualty insurance shields the insured from legal liability for losses caused by injury to other people or damage to property of others.
Here are some kinds of general insurance:
Home or Property insurance
Tenant or Renter’s insurance
Auto insurance
Liability insurance
Accident benefits/bodily injury insurance
Collision insurance
Comprehensive insurance
Business insurance
Commercial property insurance
Public liability insurance
Errors and omissions insurance
Group Insurance
“Group insurance provides a mechanism for employers to provide employee benefits as part of an employee’s total compensation package, as part of one group, outside of government-provided benefit programs” (Benefits Consultant.ca). Many workplaces in Canada offer this to provide additional benefits to employees, show that they care for their employees’ well-being, and to ensure a healthier workforce. On the practical side, costs paid into a group insurance program are considered a tax-deductible business expense.
Some commonly provided group insurance benefits in Canada are: supplementary health insurance, basic life insurance, dental insurance, long-term disability insurance, and accidental death and dismemberment insurance.
Where do your premiums go?
Insurers put premiums to pay claims costs, investments, and operational expenses. They practice diligent financial management so that claims can be paid. For instance, they invest in low-risk investments that can be easily liquidated in case they need to pay out claims. They also set money aside as a legal reserve. They are required by law to maintain this amount. The legal reserve guarantees that an insurer can pay a large number of claims within a short period of time (such as in cases of disaster, for example).
Applying for insurance
Insurers will evaluate whether they can issue a policy based on certain criteria such as:
Age
Medical history
Previous claims made
Amount of coverage you are requesting
Some types of insurance, such as life insurance, would require a medical exam. After which, the insurer would review your application and access your personal and medical history to assess your r,isk. After this assessment, you will know the amount of coverage you are qualified for and the premiums you need to pay.
No matter what type of insurance you are applying for, answer all questions on the application fully and honestly. If you withhold important information or if you lie on the application, it can be the basis for cancelling your policy, or worse, refusing your claim in the future.
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