Throughout life, you’re going to come across various insurance options. At times, some of these policies will be mandatory, but quite often, insurance is optional. While there’s no denying that insurance can protect you from unlikely events, choosing which one to get and how much coverage you need is the tricky part. Before you make any decisions, you’ll want to understand how insurance works, what types of policies are available, and if they’re the right fit for you.
So, what is insurance?
Insurance is a product that allows you to protect yourself from life’s trials and tribulations like injuries, floods, untimely deaths, and so on. While the odds of these events happening are pretty low, it can be quite expensive if they do happen.
That’s why insurance policies are available. You pay small monthly or yearly payments, under the promise that your insurance provider will pay out big if you need to make a claim.
Of course, the hope is that you never need to make a claim. However, if you do, you’ll be glad that past you signed up for insurance, as it can protect you and your loved ones from financial ruin. But before you hit the ground running for insurance policies, it’s important to understand the differences among the many options. You probably won’t need every policy available, but you should be aware of what’s out there so you can choose what’s right for you.
In Canada, if you own a vehicle, you must have auto insurance. This is vital since it’ll cover any repairs if your car is damaged in an accident. It’ll also protect you from liability claims, including personal injury and vehicle damage.
How much you’ll pay for auto insurance depends on various factors, such as your age, driving history, type of vehicle, and place of residence. Your yearly premiums, on the other hand, can vary quite a bit from one insurance provider to another, so it’s worth shopping around whenever your policy is due for renewal.
Although Canadians get free healthcare, it’s not all-inclusive. You’ll need additional health insurance to cover the cost of prescription drugs, paramedical services, eye exams, and dental care — costs that can add up quite quickly.
Generally speaking, many employers offer some kind of supplementary health insurance. However, if your benefits are lacking, or you don’t get any at all, you could purchase your own health insurance plan.
When looking at policies, be sure to find out the maximum payouts, so you’ll know exactly what you’re covered for. You’ll also want to compare the premiums you’re paying to what you’re actually claiming to see if you’re coming out ahead. Sometimes, it might be better to just set aside money for any health issues instead of buying additional insurance. That said, if a costly emergency emerges and you’re not insured, you’d have to pay everything on your own.
Many people don’t realize that your provincial health insurance may not apply once you leave the country. Even if you have regular health benefits through your employer, you may get limited coverage when you’re abroad. Travel insurance will cover you for just about every scenario possible, but it’s essential to understand that there are two types of travel insurance: travel medical and premium travel insurance.
Travel medical insurance covers your doctor and hospital visits abroad. Since the cost of medical attention outside of Canada can be expensive, it’s smart to buy a policy before your departure. Travel medical will usually also cover hospital stays, private nurses, ambulance runs, and emergency dental.
With premium travel insurance, you have access to travel medical, as well as additional coverage for incidents like trip cancellation and interruption, lost luggage, hotel/motel burglary, and car rentals. The exact coverage and price of your premium travel insurance depend on the policy.
Additionally, many travel credit cards come with some kind of travel insurance, so you may already be covered as long as you meet the terms and conditions. If you don’t have any travel cards with protection and would like coverage for multiple excursions, buying a multi-trip plan is usually the best value as it typically costs less than two individual policies.
"Insurance is a product that allows you to protect yourself from life’s trials and tribulations like injuries, floods, untimely deaths, and so on."
Home insurance protects you in a few different ways, and as a result, is usually mandatory if you want to rent or get a mortgage. Let’s say you’re currently renting. You would need content insurance, sometimes known as property or renters insurance. As the name implies, the contents of your home would be insured from theft, damage, or loss. This policy also usually applies when you’re travelling. Let’s say your laptop is stolen when you’re abroad you could be reimbursed thanks to your content insurance.
If you own your home, you’ll also need content insurance, plus a few additional options that would cover incidents such as tornadoes, floods, and sewage backups. It may sound excessive, but anything can happen and you want to be prepared. A condo unit that’s flooded with sewage could easily see $50,000 in damages; insurance would likely cover most of your expenses.
Home insurance policies will usually include liability coverage. Say someone slips on ice that’s on your driveway or on water inside your home. They could sue you for damages, but with the right liability coverage, you’d be protected from legal claims. Similar to content insurance, this coverage extends when you travel.
It may be tempting to get the cheapest home insurance policy available, but bear in mind such low-cost options may offer less coverage. Before you make a final decision, take inventory of your home and calculate the value of everything you own; you might be surprised to learn that your stuff is worth tens of thousands of dollars.
People sometimes confuse mortgage insurance with home insurance, but the products are entirely different. As you can imagine, mortgage insurance covers mortgages. However, it’s a little more complicated than that, as there are a few different types of mortgage insurances.
When you purchase a home with a down payment of less than 20%, you need to get mortgage loan insurance. This product is mandatory since you’d have a high-ratio mortgage, and lenders will want protection in case you default. How much you’ll pay will depend on the size of your down payment and the purchase price of your home. How you’ll pay will depend on your provider. CMHC is the main mortgage loan insurance provider and they allow you to pay the premium as a lump sum or add it to your regular mortgage payments.
Mortgage life insurance is another, optional product. In the event of your death, your provider will pay the remaining mortgage balance. While this type of policy is handy since your spouse and dependents wouldn’t have to worry about payments if you were to suddenly pass, there are better products available that offer more protection.
That’s because with mortgage life insurance, you pay the same monthly premiums, but the value of the policy reduces every month as you build equity. It’s more beneficial to purchase a term life insurance policy (more on this below!) since your payout would be the same no matter what.
Life insurance is optional, but you’ll want it in place if you have anyone in your life who depends on your income. Not that your beneficiaries would ever want to make a claim, but the insurance payout would make it easier for them to adjust financially. Since the payout would be tax-free and a lump-sum, they can use it on expenditures like funeral costs, mortgages, and school tuitions.
Deciding on the type of life insurance and how much you need is often the tricky part. Term life insurance is usually the most popular choice as you can choose the time period and payout amount. For example, you could choose a policy that pays out $1,000,000 with a term of 25 years. If you were to pass away during that time frame, your beneficiaries would be paid the benefit.
How much coverage you should get is up to you, but consider factoring in the following:
Time off work to mourn
Remaining mortgage balance
Education costs for children
The more coverage you want, the higher your monthly premiums will be. Insurance is typically cheaper if you get it when you’re younger and in good health. However, buying into a policy may be unnecessary if you currently don’t have any dependents. As for the term, many people will choose a period that lasts until their beneficiaries no longer need the income support. For example, up until your kids are grown up and have their own careers.
You can also look into permanent life insurance, which would cover you for your entire life. It can also be used as a tax shelter and has a cash value that builds up. Additionally, if you were to cancel your policy, you would also get some of your premiums back. While these features may sound appealing, your monthly costs will be considerably higher than term life insurance.
Generally speaking, permanent life insurance is rarely worth the costs; term life is usually good enough for most Canadians. However, make sure your broker explains the differences, and don’t be afraid to seek out a second opinion.
Critical illness insurance
Critical illness insurance is an optional policy that pays a one-time lump-sum if you’re ever diagnosed with a life-altering illness such as:
How you use the payout is entirely up to you. Some people will use it as income while they’re off work, while others will make accessibility home renovations. Similar to life insurance, you can purchase different coverage levels for various terms, but it’s unique in that there is an age cutoff of 65.
"It may be tempting to get the cheapest home insurance policy available, but bear in mind such low-cost options may offer less coverage."
It’s fair to say that disability insurance is highly underrated. With this type of insurance, your income will be replaced if you temporarily can’t work or you’re permanently disabled due to an injury or illness.
In most cases, it can cover 60-85% of your regular income. Typically, short-term disability pays on the higher end for about 90 days. If you’re still unable to work after that time, the insurer would move you to long-term disability that pays closer to 60%. Some employers offer this as a standard benefit, but if you don’t have it or are self-employed, purchasing disability insurance can be a smart decision.
The reality is, your ability to earn is often tied to your health. Your finances could be ruined even if you’re off work for just a few months. While you may qualify for some employment insurance benefits, it could be wise to give yourself some added protection.
Sometimes, the definition of disability can differ from one insurer to another, so confirm what qualifies before you purchase your policy. Plans also define what counts as an occupation — and what doesn’t. For example, an “any occupation” policy only pays if you’re unable to work any and all jobs. On the other hand, a “regular or own occupation” plan gives you benefits if you can’t do the duties of your regular job at the time you become disabled.
Balance protection insurance
Just about every credit card provider offers optional balance protection insurance. It sounds like a good product at face value as it’ll pay part of your balance or give you a lump sum if you lose your job, are diagnosed with a critical illness, or become disabled.
But dig a little deeper and you’ll learn this insurance is very similar to some of the above policies, with a significantly smaller payout. The cost for balance protection is also pretty high at about $1 for every $100 spent. But the odds of you ever cashing in for protection? Quite low.
If you decide balance protection is not for you, watch out when applying for a new credit card. Credit card providers will often prompt you to add it, and you might accidentally opt in and pay for a service you don’t really need.
Understandably, you might still be worried about your ability to pay bills if you were to become injured, but you can secure peace of mind by setting up an emergency fund.
Only get what you need
As you’ve learned, there are many insurance policies out there, but you should only get what you need. The good news is that you may already have some policies in place through your employer. If you do, run through your coverage and take note of your payout. If you don’t think you have enough coverage, you can ask to increase it, or purchase additional policies.
Navigating your way through all the different insurance policies can be complicated, so it’s often worth speaking to an insurance broker who can advise what’s best for you. While it may be annoying to pay premiums for something you may never use, insurance can be worthwhile for protection of your loved ones and your own peace of mind.