Introduction to Insurance
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What is Insurance?
Basically, insurance is paying someone else to assume that would normally be yours. You pay the insurer a fixed amount each month or yearly, and they then, undertake the responsibility of paying for the costs of repair or replacement of the asset that you have insured, such as your house or automobile.
For example, if you buy a house, there are certain liabilities (responsibilities as the owner), that come with that purchase. If someone were to slip and fall on your walkway, you could be liable for that person’s injury. Or, your house could catch fire and burn down. Who would pay to rebuild it? What if someone was injured in the fire. Who would pay for the medical bills? If your house wasn’t completely paid for, who would now pay for the outstanding mortgage? If you have insurance, and depending upon the terms of coverage, your insurance company would pay for these expenses—not you.
In some ways, insurance is like a wager you make with the insurer. You’re betting that something terrible, such as your house being broken into or it being burned down, will happen to you. The insurer is betting that it won’t. But you don’t want to take any chances, so you buy insurance.
How is the insurance company protected?
Since bad things generally don’t happen to everyone at the same time, the insurer tends to come out ahead. Unless of course, there is a huge disaster and all the houses in your neighbourhood burn down. In which case, the insurer will have to pay out more money than they have. That is why insurance companies arrange re-insurance to protect their assets!
To minimize the risk of paying out more money than they have, insurers specify in detail the kinds of losses they will or will not cover. Make sure you understand exactly what coverage you are buying. This is precisely where an independent insurance broker can be very helpful. They use their experience and expertise to explain, clearly and simply, your coverage options so that you get the right coverage for you. (To understand better the advantages of using an independent broker, see Why Use a Broker. For details on how independent brokers are paid, see Our Transparency Policy.
What Insurance Do I Need?
Some types of insurance you have little choice in buying. If you borrow money to buy a new car or get a mortgage to buy a house, the lending institution will require you to buy insurance and will often dictate the amount and type. That’s because they want to protect their investment in your car or home. You’re using their money, and if you couldn’t pay the loan back or the item was destroyed, they want to make sure they still get their money.
Residents in British Columbia who own a vehicle are required by law to buy liability insurance. Such insurance covers the cost of any potential injury or damage to another party in case of an accident. In most cases, the costs due to injury and loss resulting from car accidents is often so high that few individuals if any, could pay the financial demands out of their own pocket.
What about insurance that is voluntary?
Since everyone’s situation is different, each person needs to identify his/her particular needs. Do you need health insurance? What about medical insurance when traveling outside of the province or country? Can you afford to take time off work if you get sick? What if your illness lasts months or years?
If you became disabled due to an accident or serious illness, could you support yourself and your family?
The answers you give to these and similar questions will help you determine whether you need insurance to cover these possibilities. A good rule of thumb when making an insurance decision is to ask yourself, what can I not afford to lose? Those are the things you should insure.
Once again, it makes sense in view of the importance of these issues and the fact that what you decide can have a huge adverse financial impact on your future, to consult with an insurance broker. It doesn’t cost you anything to gain a professional opinion and it can pay off in a big way at “claims time.” Call us or come andsee us.
Why Does Insurance Seem So Expensive?
Actually, the issue of cost is relative. What may seem like a lot to some is reasonable to others. Clearly, what a young, single person needs in insurance is quite different from what a family with a home, car and four kids needs. Premiums are also affected by the social status people find themselves in. Depending upon the type of insurance you are buying, your age, condition of your health, where you live, what you do for a living, your claim history, and so on, will determine how much your insurance will cost.
Insurers calculate what they charge you by closely examining and averaging out what it cost others who suffered similar losses and who are in the same rate group as you. For example, statistics have consistently shown that drivers under 25 cause a disproportionate number of accidents and injuries. So, not surprisingly, under some insurance programs, those under 25 years-of-age are required to pay higher auto insurance premiums—even though some young drivers may be very careful and never cause an accident. The same holds true for property. If you insist on buying that dream house 100 miles from the nearest fire station in dense bush or on a sand spit reaching out into the ocean, then you can expect your premium to be higher to offset the increased risk.
Now, for someone who really wants to build their dream home in a high risk area, and he or she can easily afford to pay higher premiums, it may not seem expensive at all. So, the cost of insurance is relative. But for most of us, there is a lot of competition for our hard-earned income, which includes insurance payments. So, it may seem that insurance premiums are costly.
Some people decide not to buy insurance at all. But that, more often than not, is a mistake! For example, it is no exaggeration that not having insurance, or having inadequate insurance, could easily put you into a desperate financial situation in a heartbeat! Contrary to popular opinion, insurance is not a rip-off.
Looking at the long-term
It should be noted that price is not the only criteria to consider when buying insurance. Remember, insurance is for times of serious need. The payments might appear high or hurt a little now, but buying insurance is a way to protect your future and it gives you peace of mind during the trip there. To spend a fixed amount each month to pay for your insurance will appear insignificant when your vehicle or home is replaced due to accident or fire. Without insurance, most people never recover from their losses.
What determines the cost of insurance?
There are a number of factors that determine the cost of insurance. Let’s illustrate two ways that these costs are determined. The money that an insurance company collects from you and I (and hundreds of other people in our community), are referred to as “premiums”. The collected money or premiums are put into a big pot. For example, when you or I have to make a claim for damages to our house, the insurance company reaches into that pot and pays for the damages.
If, however, too many people are making claims for house damages, then the insurance company needs to increase the price of everyone’s premiums,so that there will be enough money in the pot to pay for future claims. Examples of recent disasters that have strained insurance companies’ resources are the fires in the Okanagan in 2004, the 9-11 terrorist attack in New York in 2001, and hurricane Katrina that struck New Orleans in 2005.
To further protect their clients and the money in the pot, insurance companies take some of the money from the pot and make investments with it. If the investments are good, the money taken out of the pot for the investments can be put back in, plus even some of the profit that was made from the sound investments.
However, as anyone who has made investments knows, the payback on investments can go up or down. So, what happens when the investment is poor? First, there is less money in the pot because some of it was taken to make the investment in the first place. Second, the money taken cannot be replaced—or at least as quickly as if it had been a good investment. So when this happens, and to keep enough money in the pot so that claims can be paid out, insurance companies must raise the price of each person’s premiums.
What about when the investments made are good ones and more money is put back into the pot? Do the insurance companies ever lower their premiums? Yes, they do.
Another contributing factor
Insurance premiums also go up due to the huge rise in insurance fraud. The Canadian Coalition Against Insurance Fraud estimates that anywhere from 15 to 22% of all personal injury claims are dishonest—to the tune of over $500 million a year! So, it just isn’t true that insurance fraud is a ‘victimless’ crime. The victims are us, as our premiums rise to make up for the losses caused by fraudsters.
When Should I Make a Claim?
The easy answer of course is, when you suffer a loss. After all, that’s why you bought insurance. And, it is at “claims time” when you really see whether you understood your coverage options and bought adequate insurance for your needs.
“Claims time” is also when you really see whether your broker is your best friend. If your broker has taken the time to really understand your needs and carefully explained your options, and then you bought insurance accordingly, you have nothing to worry about. Your claims will be processed without any hiccups. Your broker will be there to support you every step of the way. (See Why Use a Broker).
There are other important things you need to consider when filing a claim, however. The number of claims that you file and the amount of each claim contributes to your claim history. Your claim history has a direct bearing on the cost of your premiums—the more claims you make, the higher your premiums will be. That’s because your draw from the total insurance fund or pot, is greater than someone who makes few or no claims. It wouldn’t be fair to everyone else, if you didn’t pay back more into the overall “pot” to compensate for what you’re costing.
So, although you may be entitled to make a claim, claiming for losses that are not serious may be inadvisable. For example, if you have numerous car accidents, especially if they tend to be your fault, you will automatically be considered a high risk and your premiums will increase. So, making a claim for a minor fender-bender might actually hurt you, even though your policy may entitle you to make a claim. The same holds true for house insurance.
Claiming for small repairs or minor damage will tend to put you into a higher risk category, with the subsequent increase in your premium price.
However, when you have suffered a significant or serious loss, then by all means, you should claim for the amount you’re entitled to. This is what you paid and prepared for. And of course, it is always your decision whether or not to file a claim.
Because Park Insurance is an independent broker, you can trust their professional advice. They work for you and they have nothing to gain or to lose by objectively advising you on whether it is to your advantage to file a claim or not. (See Why Use a Broker?)
The Cheapest Price Or The Best Value—Which?
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For some insurance shoppers, the cheapest price is the name of the game. With some purchases, we can sometimes get away with “buying on the cheap.” When it comes to buying insurance, the cheapest price isn’t always the best price. After all, cheap insurance, like cheap medicine, is no guarantee that it will really protect you when you need it.
It makes much more sense to look for value—getting adequate coverage at the best rates. Getting good value for your insurance dollar does not necessarily mean that your premiums will cost more. In fact, it may cost you the same, and provide you with better coverage.
Most importantly, buying adequate coverage now is always “cheaper” when you come to make a claim. Buying insurance at the cheapest prices may mean you have inadequate coverage, which can translate into big disappointments at “claims time.”
Keeping Your Insurance Costs Down
Since your Claim History and other factors mentioned earlier, determine what you will pay for insurance, anything you can do to improve your insurance profile will help lessen the cost of your premiums.
For example, certain cars cost more to repair than others. So buying a model that has better than average repair record may help lower your premiums. Or, since smokers are at much higher risk for health problems, insurers will penalize those who smoke and reward those who don’t with lower premiums. It’s also important to buy only the coverage you really need. No more, no less.
Money-Saving Tips
- Raise your deductible on all your policies as high as you can reasonably manage in the event of a loss.
- Do report insurance fraud. It costs everyone!
- Check with your broker before buying a new car or other big-ticket item. Ask them about the top 10 cars stolen each year, for example.
- Install an alarm system in your home.
- Drive sanely and avoid tickets. The better your record the lower your premiums may be.
- Ditto for accidents.
- Ask your broker about combining your various types of insurances together. Some companies will offer a discount off your home premium, if you buy your home and auto insurance from them.
- Shop around so that you get excellent value for your money—the best coverage at the best rates.
- Then call Park Insurance—your independent broker for a quote and experience a professional insurance touch.
Next: Why Use A Broker?
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