6.1.1 What is insurance?

From: Financial Consumer Agency of Canada

Insurance is a contract, called a policy, between you and an insurance provider, under which you can be compensated for certain losses. You pay a fee called a premium. In exchange, the insurance company agrees to pay you a certain amount of money if the event you are insured against happens during the term of the policy.

Your premiums are pooled with those of other policyholders at your insurance company. The money in the pool is then used to pay policyholders’ claims.

Many insurance policies include a deductible. That is a portion of the claim that you pay up front, before the insurer pays the rest. If you pay a higher deductible, your premiums may be lower.

Other insurance policies do not have a deductible, but have an initial waiting period during which you cover the financial costs before the coverage begins.

Some types of insurance are mandatory—for example, all provinces and territories in Canada require basic insurance if you own a vehicle. Others types are optional—for example, you can choose to buy additional types of vehicle insurance beyond the basic required level.

When you buy life or health insurance, you usually sign a contract before you have had a chance to carefully read the policy. You then have a 10-day grace period in which to make sure it meets your needs and to cancel it if you feel it does not. Any premiums you have paid will be refunded.

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
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