The insurance industry is its own world, one that uses very specific terms not everyone will automatically understand.
If you don’t understand the terms below, you won’t be able to fully understand your auto insurance coverage. Knowing these terms and concepts ensures you’re getting the right and most cost-effective insurance policy for you, your family, and your vehicle(s).
Let’s get into it.
When your insurance policy talks about the ‘deductible’ it’s talking about the amount of money you’ll have to deduct from the total cost of repair or replacement before the insurance provider steps in to pay for the remainder of a damage claim.
Deductibles for auto insurance usually range from $0 to $1,500.
So, say your deductible is $1,000. If you damage your car and get a repair estimate that costs around $2,000, you’ll have to foot the first thousand dollars before your insurance company pays for the rest. Alternatively, if your total repair cost is estimated at $800, you won't recieve insurance reimbursement at all.
Your deductible and premium are also related – the higher your deductible, the lower your premium, and vice versa. Setting your deductible higher will save you money each month surely, but you’ll have to pay that high deductible if you ever find yourself in an accident.
Your premium is how much your insurance costs for the year. You pay premiums so that you’ll be covered in the event of loss or damage to your vehicle.
You can pay your premiums monthly, bi-annually, or annually. There may be discounts for prepaying (paying annually) depending on your insurer.
The term “rate” can also be used to refer to your insurance premium. Make sure to compare premium quotes to make sure you’re getting the best deal on your auto insurance.
Also known as ‘bodily injury liability,’ liability coverage is usually the default and most basic coverage you are required to purchase by law for your vehicle.
Liability coverage protects you in case you cause a serious accident by funding your legal defense, paying for the victim’s pain and suffering, plus their medical costs and/or lost wages.
The value of your coverage in this category will determine how much money the insurer will spend on your liability claims before they cap your coverage. An average amount required by law in Canada is a minimum $200,000 worth of liability coverage, however, this all depends on your province.
If you have collision coverage, it’ll step in to pay for damages caused by accidents where you are at fault. If your car is damaged by no fault of your own, repairs will be covered by the other driver’s insurance provider.
This coverage category is not required by law, but it may come in handy if you live in a dense, urban city with high traffic or collision statistics. Payouts are usually calculated based on the cash value of your car, so, if you drive an old clunker, this policy may not be worth the cost.
Also known as ‘physical damage coverage,’ comprehensive coverage pays for many of the random events that go on to damage a vehicle apart from a collision with another car.
Events or ‘perils’ may be specified or name in the policy, or it may be overarching protection. Make sure you know what level of comprehensive coverage you’re purchasing.
Random physical damage could come from a range of causes, including falling objects (trees!), hitting an animal or inanimate object (garage door!), broken windows, natural weather events, etc.
Understand what sort of natural events your area or city is most likely to encounter and make an educated decision as to what level of auto insurance fits you the best.