Home insurance protects you, your family, your home and your belongings. If an unforeseen incident were to cause loss or damages to your home, i.e. fire, theft, water leak, etc, it will be very costly to you to replace or repair. Home insurance protects you against such incidences. When you purchase home insurance, the insurer is agreeing to take responsibility for the cost of such incidences, as outlined in the policy details, in return for payments (or premiums) paid to the insurer.
No. The government regulates auto insurance, but not home insurance. However, if you have a mortgage, your mortgage lender or bank will require you to have home insurance. In other words, they will only lend you the money for the mortgage if they know that you have basic home insurance that will cover the value of the mortgage.
You need to decide if basis insurance is enough for you or if you'd like the added protection of broad or comprehensive coverage.
The Insurance Bureau of Canada sites 4 main types of home insurance policies. However, the specifics of each policy may change depending on the insurer, so it's best to make sure you read your policy details to see what's covered and what's not.
1. Comprehensive Coverage. This policy will provide the most coverage. It covers the building and its contents for all risks, except for:
a. Optional coverage risks - risks that are not included in normal policies but which can be purchased separately (this includes earthquake coverage, and sewer back up)
b. Uninsurable peril - risks which you can not purchase insurance for because they are avoidable (i.e. flooding after you have built your house on a flood plain)
2. Basic Coverage/Named Perils. This will cover perils (risks/incidents) that you specifically state in the policy. There is a personal financial risk to this type of coverage because often we can't foresee what we will need home insurance coverage for. Therefore if something happens that is not specifically named in the policy the insurer will not cover any costs associated with that peril.
3. Broad Coverage. This policy provides coverage that is half way in between the Comprehensive Coverage and the Basic Coverage. It provides comprehensive coverage on the main items like the building, but only named perils coverage on the contents.
4. No Frills Coverage. This type of coverage is not offered by all insurers and it's only offered on properties that don't meet normal standards. For example, if there are physical problems with the home, the insurer may not offer you any of the other policies above, but they may offer you a very limited no frills policy.
Home insurance premiums are calculated based on probabilities and risk factors. The insurer will assess how likely it is that an incident will take place that they will need to provide coverage for. If the risk is high, and the cost to cover that risk is high, your premiums will increase.
Although there are a number of factors that will affect your home insurance premiums, you ultimately get to decide what type of coverage you want. A more in-depth policy, covering more factors will result in higher premiums.
Specific factors that affect home insurance premiums are:
- Location - Every neighbourhood has a history, including the number and type of insurance claims that have been filed in the area. This history is used by the insurer to make an assumption about the likelihood of certain incidences. For example, some neighbourhoods have a higher crime rate than others so home burglaries will be more likely. Therefore, the cost of home insurance will vary from place to place.
- The value of your home and belongings - Quite simply, if you have a larger home, built with high quality materials and full of expensive contents, it will cost more to replace those items, resulting in higher premiums.
- Special uses for your home - If you rent out a room, run a business from home or use your home for anything out of the ordinary, this will affect premiums.
- The distance to your closest fire hydrant - In the case of a fire, the insurer needs to know the likelihood of the fire being extinguished quickly. This can be done more easily if the home is close to a fire hydrant. In cases where in the home is far from a source of water (i.e. out in the country), the premiums may be higher.
- Source of heating - if your home is heated electrically or with a gas furnace, your home insurance premium will be lower than if it was heated by an oil tank. Oil tanks have a high environmental cost associated with them.
- Type of electricity - Be prepared to answer a number of questions about the electricity in your home. For example, how old is the wiring, what kind of wiring is it, do you have breakers or fuses, etc. Household electrics are a common cause of fire; hence, insurers pay special attention to this area.
- Type of pipes - If your pipes have been updated to copper or plastic from galvanized or lead piping, there is less of a chance that the pipes will leak or break, which could result in lower premiums.
Other questions that an insurer may ask that will affect your premiums are:
- Do you have a wood burning stove? These tend to cause fires.
- Do you have a home security system? Is the system monitored?
- Do you have a pool?
- When was the roof last replaced?
The premiums that all policy holders pay are put towards covering the costs that the insurer needs to pay when other policy holders make claims. Therefore the premiums of many cover the losses of a few.
The Insurance Bureau or Canada states that for every dollar insurance companies collect in premiums, 60 cents will go back to policyholders to pay claims, 18 cents goes to pay operating expenses and 16 cents goes back into communities in the form of taxes. Insurers keep 6 cents as profit. However, premiums don't just sit in the insurer's bank account waiting for someone to make a claim. The money is always moving. On a daily basis, there are claims to be paid out, and other operating costs such as taxes, salaries, office supplies, rent, utilities, etc. Insurers also always keep a reserve fund incase an incident takes place which affects a lot of policy holders (i.e. ice storm) and they need to gain access to the money quickly.
Any money not used on a daily basis or in the reserve fund, will be invested by the insurer to make a return. Insurers need to ensure that the premium money is safe and easily accessible, so they tend to make low-risk investments in liquid assets, such as government bonds.
Your broker/insurer will ask you a number of questions about your home. Based on these answers the insurance company will consider the risk involved in agreeing to protect your home. This risk will come with a price. The premium is the price that the insurance company will charge to insure your home.
See: How are home insurance premiums calculated, for a list of specific factors that will affect your home insurance premiums.
Home insurance can be purchased from:
- a licensed insurance broker;
- a licensed insurance agent; or
- a licensed insurance company.
An insurance broker will operate on behalf of a number of different insurance companies. They can typically get you a lower rate because they can easily compare like-for-like products for you.
An insurance agent represents only one insurer.
Some insurance companies will also sell direct to the consumer through a direct writer. Sometimes you can purchase through a call centre or by applying online.
There are 3 things you should consider when looking for home insurance:
1. Shop around to find the best rate. Insurance premiums for the same home can vary greatly from one insurance company to another, even by hundreds of dollars. It's important to do your research, compare the market to make sure your getting the best policy coverage for you at the lowest rate.
2. Buy from a trusted source. Whether you decide to purchase directly from an insurer or use an insurance broker, make sure the company or person is reputable. The Ontario government regulates the sale of all insurance products, so you can only sell insurance if you are licensed to do so. To check if an insurer or broker is licensed in Ontario, visit the Financial Services Commission of Ontario FSCO or visit the Registered Insurance Brokers of Ontario, RIBO.
3. Read and understand the fine print. It's important to understand what's covered and what's not. If you don't understand the wording or something is unclear, ask for clarification. It's also important to find out what the process is for making a claim. Any question is a valid question, so ask before you purchase.
You can always find a licensed broker, agent or insurance company through the internet. Websites such as the Canadian Association of Direct Response Insurers at www.cadri.com and the Insurance Brokers Association of Canada at www.ibac.ca will provide you with lists of licensed insurance sellers in your area. Just remember that each province has its own licensing. So a broker in Ontario isn't necessarily licensed in Manitoba.
You should also consider asking friends, family and colleagues if they can recommend a trusted advisor. Whoever you choose to work with, that advisor should take the time to explain the differences in home insurance policies and make you feel comfortable about your purchase.
Be honest. If you answer every question truthfully when it comes to purchasing home insurance, then you'll get the right policy for your home and you'll be better off in the long run. If you try to pull the wool over the insurer's eyes, when it comes to filing a claim you can bet that the insurer will do a bit of digging and if you lied on the application, or even neglected to disclose some important information, it could cost you a lot of money.
Also, if you do need to make a legitimate claim, claim for the try value of the losses or damages. Inflating an insurance claim is a crime and you have little chance of getting away with it as an insurance adjuster will probably inspect the details of your claim to ensure it's correct.
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