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Smart Investor Tip of the Day
If you are starting a family, buying a home, starting a business, or buying a car you will need insurance. Insurance protects you and your property from the infinite unknowns. Without insurance the economy would slow to a grind because one simple unforeseen accident could render a business permanently closed.
The insurance industry is one of the largest in Canada and represents a bustling $50 billion sector. Most Canadians have insurance in one form or another and in most cases insurance accounts for one of their top five expenditures.
Most people don’t know how insurance works. It is actually quite simple. Payments (premiums) of the many cover the losses of the few. In other words, all premiums go into one giant pot at the insurance company and those who experience a loss (and insured) are eligible to draw from that pot. Because only a relative few draw from this pot in a given year there is ample money available to cover costly losses. This technique is called “risk spreading”.
Insurance policies are a promissory to protect you against certain perils and/or cause of loss for a time period. Your premiums you pay do not build up as they would for types of life insurances and in most cases you will need to cover a deductible (the amount of a claim that you have to pay) before your insurance takes over. Premiums tend to go up after filing claim(s) as a measure to protect the insurance company from going under. This is one of the most infuriating and fearful aspect for policyholders when they file claims.
A misconception is that insurance covers every accident that befalls an individual. This is not true. Insurance policies are very specific and laden with legalese on what is and what isn’t covered in a policy. So it is always a necessity that you read and understand your insurance before you begin paying the premiums. No one wants to be faithfully paying insurance only to find out your claim is not covered years later when you need it most.