We all want financial security for ourselves and our families. We know that having insurance can help us and that it can contribute to a solid financial plan. however, many of us don’t really think about insurance. Most of the time, we don’t think about risks or the unexpected happening (after all, they are unexpected!), so we leave things to chance. It may also be because we don’t know much about insurance and it’s too complicated to pay attention to.
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so, to start with, we’ve broken a few things down to a bare minimum. Next up is Insurance 101: The Five Basic Things You Need to Know About Insurance:
Reading: What to know about insurance
first, what is insurance?
- Insurance is a tool to reduce economic loss or hardship.
- is a contract between the insured and an insurance provider under which the insured may be paid for certain losses. the insurance provider pools the risks of the clients so that the payments are affordable for the insured (investopedia).
- is protection that can help cover the cost of unexpected events such as theft, illness, property damage, or death.
- The protection or coverage you receive may be for a limited period of time or for your entire lifetime.
- Term: Provides coverage for a specific period of time. If the insured dies within the coverage period (and premiums are paid), the beneficiary receives the death benefit as stated in the policy. coverage ends in the specified term. it can be renewed after the term, however, the premium may increase as premiums may depend on the age of the insured.
- permanent: covers the insured throughout his life (unless the insured does not pay the premiums). there are two types:
- whole life insurance: This ensures that your premiums will not change as you age. this type of insurance has a guaranteed minimum cash value and death benefit amount.
- universal life insurance: this is a product that combines life insurance and investment.
- complementary medical insurance
- disability insurance
- travel medical insurance
- critical illness or trauma insurance
- long term care insurance
- home or property insurance
- renters or renters insurance
- car insurance
- civil liability insurance
- accident benefits/bodily injury insurance
- collision insurance
- all risk insurance
- company insurance
- commercial property insurance
- civil liability insurance
- errors and omissions insurance
- medical history
- previous statements made
- amount of coverage you are requesting
In exchange 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 is based on the likelihood that you will suffer a claimable loss. Other factors considered when calculating premiums may include the insured’s age, health, lifestyle, or family history.
For medical, dental, home and auto insurance policies, the amount of the premiums also depends on the deductible. This is the amount of your claim that you agree to pay before the insurer pays the rest. Of course, choosing a higher deductible will lower your premiums because you’re agreeing to pay more of your loss.
how does insurance work?
When people buy insurance, they pool their money with many others. part of that fund of money helps the insured who suffer difficulties in that period. Hardships can be home, car, or business losses. you are covered only for losses written in your contract, not for foreseeable 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 help claim benefits. Supporting documents, depending on the type of loss (for example, photographs of an injury or property damage for a property or casualty insurance claim, or a death certificate for a life insurance claim) will be required during processing or investigation of claims.
different types of insurance
Life insurance provides payment to the insured’s family and loved ones after the insured’s death. the insured names a person or persons (beneficiary/beneficiaries) who will receive the death benefit as established in the policy. earnings or death benefit are tax-free.
There are two types of life insurance:
Health insurance can help you pay for services not covered by the provincial health plan. Some types can supplement your income if you have a serious illness or injury. other guys can pay for medical bills if you get sick on vacation.
Here are some types of health insurance:
read do I need supplemental health insurance? to learn more.
property and casualty insurance (general)
Property insurance covers loss or damage to your home or personal belongings, your car, or your business. Accident insurance protects the insured from legal liability for losses caused by injuries to other people or damage to the property of others.
Here are some types of general insurance:
“Group insurance provides a mechanism for employers to provide employee benefits as part of an employee’s total compensation package, as part of a group, outside of government-provided benefit programs” (benefits consultant .AC). Many workplaces in Canada offer this to provide additional benefits to employees, show that they care about the well-being of their employees, and ensure a healthier workforce. From a practical standpoint, costs paid into a group insurance program are considered tax-deductible business expenses.
Some of the group insurance benefits commonly provided in Canada are: supplemental health insurance, basic life insurance, dental insurance, long-term disability insurance, and accidental death and dismemberment insurance.
where do your cousins go?
Insurers allocate premiums to pay the costs of claims, investments and operating expenses. they practice diligent financial management so that claims can be paid. for example, they invest in low-risk investments that can be easily liquidated should they need to pay claims. they also set aside money 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 in a short period of time (as in cases of loss, for example).
Insurers will assess whether they can issue a policy based on certain criteria such as:
Some types of insurance, like life insurance, require a medical exam. after which, the insurer would review her application and access her personal and medical history to assess her risk. After this evaluation, she will know the amount of coverage for which she qualifies and the premiums she must pay.
Regardless of what type of insurance you are applying for, answer all questions on the application completely and honestly. If you withhold important information or lie on the application, it may be grounds for canceling your policy or worse, denying your claim in the future.
definition of terms:
policy: a legal contract between you and the insurer. details what risks are covered, under what circumstances the insurer will pay you, how much money, and what type of benefit you will receive if you file a claim.
policy holder: the insured or the person covered by the policy.
Coverage: The amount of protection you have purchased. It is also the maximum amount the insurance company will pay you if you make a claim for a loss or event covered by your policy.
benefit: the amount the insurer will pay you if they accept your claim.
premium: the amount you pay for insurance.
Cash Value – This is the amount the insurer pays the policyholder when a life insurance policy is cancelled. It can also be an amount added to the death benefit and can be paid at the death of the insured. this term is used with permanent life insurance policies.
death benefit: the amount that the insurer will pay to the beneficiary or beneficiaries in the event of the death of the insured.
claim: This is the official notice to your insurer to be paid for a loss or event covered by your insurance policy.
beneficiary: This is the person or entity that the insured appoints or assigns to receive the proceeds from the policy. A beneficiary can be revocable (can be changed at any time without informing the beneficiary) or irrevocable (cannot be changed without the beneficiary’s written permission).
deductible: the amount you agree to pay before the insurer pays the rest.
exclusions: things that are not covered by your policy. For example, some health insurance policies may exclude certain medical conditions you had before you applied for insurance, or a travel insurance policy may exclude claims if you travel to a high-risk country. That’s why it’s important to read your policy carefully to check what it covers and what it doesn’t, so there are no surprises when it comes time to claim.
risk: probability or possibility of the occurrence of an insured event, such as loss, injury or death, while the policy is in force.
Rider: is a clause or term added to your insurance policy to provide protection. this has an additional cost because it covers risks not covered in the basic policy.
term: the period of time that is covered by your policy.
Sources: Module 6: Insurance Agency, Consumer Financial Canada; understanding the basics of insurance, consumer finance agency of canada; insurance bureau of canada; and Insurance Basics (Insurance 101), Insurance Bureau of Canada. all consulted on January 23, 2018.