Insurance

Insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as "the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment". An insurer is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium.

A common question is why do I need insurance? If you own things that will be very hard to replace without facing severe financial hardship, you need insurance. You just have to get some stuff stolen from your home, or damage your car, or become disabled, or die prematurely to justify having insurance.

This article offers an overview of insurance in Canada. It starts by defining some key terms, then lists the main types of personal, as well as property and casualty insurance. It then provides examples of things you should insure, and things you should not, or probably not, insure. The article concludes with advice on buying insurance, and lists organizations offering complaint registration and resolution procedures.

Definitions
The Financial Consumer Agency of Canada offers the following definitions:
 * Insured: The person or persons protected by the insurance policy;
 * Insurer: The insurance company that issues the insurance policy;
 * Policyholder: The person who holds the insurance policy or contract with the insurer; usually, but not always, the insured;
 * Premium: The amount you pay to buy insurance, usually paid monthly, quarterly or annually;
 * Policy: A legal contract between you and the insurer, which specifies what events are covered by the insurer, under what circumstances the insurer will compensate you, and how much compensation or what type of benefit you will receive if you make a claim;
 * Deductible: The amount of your claim that you agree to pay before the insurer pays the rest;
 * Grace period: 10 days immediately following the day you purchase an insurance policy, during which you may cancel the policy for a full refund of any premiums paid;
 * Coverage: The amount of protection you have purchased; also, the maximum amount of money the insurance company will pay you for a claim;
 * Exclusions: Things that are not covered by your policy;
 * Term: The time period covered by the insurance policy;
 * Risk: The likelihood that an insured event, such as loss or injury, will occur while your policy is in effect.

Personal insurance

 * Accidental death & dismemberment insurance
 * Annuities
 * Dental insurance
 * Disability insurance
 * Extended health insurance
 * Life insurance
 * Long term care insurance
 * Travel insurance

Property and casualty insurance

 * Auto insurance
 * Deposit insurance
 * Home insurance
 * Mortgage insurance
 * Tenant insurance
 * Title insurance

What things should I insure?
The guiding principle for insurance is to use it only when a loss would be financially intolerable.

You pay for insurance when:
 * It is legally required (e.g. liability insurance for a vehicle)
 * It is contractually required (e.g. your mortgage lender insists you have fire insurance)
 * A loss would cause serious financial hardship to your family

How's your health? Could you afford to lose it? If you become sick or disabled, temporarily or permanently, would you be able to support yourself?

How about your life? If you were to die suddenly, what kind of financial hardship would result? Would there be dependents left without basic support? Would your burial costs impose undue hardship on others?

What if you own a car, home, or other personal possessions outright? Start by thinking about which of these are the most valuable. If these valuables were damaged or lost by accident or theft, would this lead to severe financial hardship?

How to decide
The extent of potential losses can be compared against a person's liquid financial capital. For example, loosing your employment income for several years due to a disability, the total loss of a house, or getting sued for $2M, are a good fraction of, of exceed, most people's liquid financial capital. Such risks clearly need to be managed.

Another factor is the probability of a loss. If the probability is low, you can pool the risk with thousands of other people, and cover the risk for a reasonable premium. Typical examples are term life insurance for a 30 year old person in good health, or home insurance: the potential losses are high, but the probability of loss is quite low, so the risk can be covered and the premiums are affordable.

However if the probability of a loss is too high, the premiums will become unaffordable, or the insurance will not be offered.

Why some people don't buy the insurance they need
Thinking about insurance can be boring or unpleasant. Nobody likes to think about accidents, illnesses, death or their house burning down. The FCAC lists these other reasons why some people don't buy the insurance they need:
 * We think that the likelihood of a given event happening to us is small, so we don't take the risk seriously;
 * We would rather spend our money on concrete things in the here-and-now than put it aside for vague possibilities in the future;
 * We're too busy living our lives and dealing with everyday concerns to think about what our needs might be down the road;
 * We find the variety and features of different types of insurance confusing and overwhelming, so we don't act;
 * We can't afford it.

These reasons mostly relate to emotions or personal habits, rather than facts and logic.

What isn't worth insuring?
Insurance companies expect, in aggregate, to make money on the insurance that they offer. Generally, insuring things that you can easily afford to replace is a waste of money. For example, extended-warranty contracts on minor items are insurance, and it is likely not worthwhile to purchase such contracts for a DVD player or microwave oven.

If your financial situation is in good order, you can choose to self-insure for certain risks. Collision insurance on a car may not be needed once it is several years old, assuming you can afford to replace it. Another self-insurance strategy is to increase your deductibles on home/auto insurance, but set the money saved aside in "small losses fund".

What kinds of insurance should I probably avoid?

 * Mortgage life insurance. An alternative to consider is term insurance.
 * Mortgage disability insurance. If you become disabled, paying your mortgage will be not be your only expense. Look instead at regular disability insurance
 * Flight insurance - The odds of being killed in a plane crash are about 1 in 20 million for airlines with good safety records.
 * Insurance on outstanding credit card balances. This can be expensive for the coverage you get (e.g., it may only cover the minimum monthly payment ) and may be redundant if you have adequate life and disability insurance.

As with everything, there are exceptions. The individual should examine his own situation to determine whether or not he needs these types on insurance.

Becoming an informed consumer
Before you contact on insurance company or agent/broker, read extensively on the type of insurance you are interested in, so you can make an informed decision. This is especially critical for multi-year commitments like life insurance, disability insurance, etc.

Your incentives are not completely aligned with those of the person providing insurance advice. The insurance company will make a larger profit if you buy more insurance than you need. The agent or broker may get a larger commission if they convince you to get more insurance than you need.

You can reduce your information disadvantage by obtaining independent information beforehand and thinking carefully about your needs. Exactly what risks are you covering? How much deductible (or how long a waiting period) can you afford? How long do you really need this protection for? Etc.

For general information on buying insurance, see Getting an insurance policy -- Financial Consumer Agency of Canada.

Insurance quotes
Get several quotes from different companies for the same product, so you can compare prices.

Insurer financial ratings
While price matters, it's not the only concern. The price may be right but the insurance issuer may not be if you can't get anywhere on a claim. Make sure that your insurance, especially long term relationships such as with life, disability, or long-term care, is with healthy companies. Company financial ratings are provided by A.M. Best, DBRS, Moody's and Standard & Poor's.

Organizations offering formal complaint registration and resolution procedures

 * General Insurance Ombudservice
 * Canadian Life and Health Insurance Association
 * Financial Services Commission of Ontario
 * Registered Insurance Brokers of Ontario
 * Provincial Insurance Council (Alberta)
 * Provincial Insurance Council (British Columbia)
 * Provincial Insurance Council (Manitoba)
 * Autorité des marchés financiers (Quebec)
 * Provincial Insurance Council (Saskatchewan)

Suggested reading
Moshe A. Milevsky and Aron A. Gottesman, Insurance Logic, 2nd edition, Captus Press, 2005.