How does car insurance work?

Car insurance works a lot like home insurance, except instead of providing coverage for your home, your policy provides coverage for your car. The premiums you’ll pay to an insurance company is based on the insurance company’s estimated annual cost of covering your vehicle.

Your car insurance premiums are based on several factors. One of them is how much the insurance company believes it will have to pay out in claims in the coming year. You’ll pay your car insurance company premiums on a monthly or annual basis in exchange for taking on your vehicle’s risk.

The insurance company then pools all the premiums it collects from the drivers it protects together into one large pool. The insurance company uses the pool of premiums to cover the losses of the drivers who make claims in the year.

You’re covered for the losses in your car insurance contract only. It’s important to review your contract in detail before signing up for the coverage to make sure you understand the extent of your coverage. Car insurance contracts aren’t always the easiest to understand. If you need clarification about your coverage, it’s a good idea to speak with your insurance representative to get a better understanding.

Who needs auto insurance?

Simply put, if you’re a motorist in Canada, you’re required to have auto insurance, and skimping out on it can lead to a major fine. Ontarians caught without auto insurance, for example, are looking at a fine between $5,000 and $50,000 for a single offense, and could also have their driver’s licence suspended and car impounded.

But that’s not all. Anyone found to be driving without valid auto insurance could be considered a high-risk driver, and as a result might face higher auto insurance premiums from insurance companies, or in some cases, might be refused auto insurance outright in the future. If an uninsured driver is involved in a collision and found at fault for an accident causing injury or death, they could be found personally responsible for the injured party’s medical costs and any other losses.

What types of auto insurance exist in Canada?

The minimum level of auto insurance required in Canada varies provincially, and it’s important to familiarize yourself with your province or territory’s requirements to ensure you comply.

Third-party liability coverage

The most basic type of auto insurance is third-party liability coverage. Third-party liability coverage protects you, the policyholder, against paying for damage you cause to someone’s property. It also protects you if someone else is killed or injured as a result of an at-fault car accident committed by you. The minimum coverage varies by province, but at the very least it should cover the medical costs of anyone injured in an accident. Third-party liability coverage is mandatory in Canada.

Collision coverage

The second type of insurance is collision coverage. In addition to protecting you from third-party liabilities, collision coverage also covers you if you hit something other than a vehicle, such as an embankment or guardrail. It’s fairly common for this policy to also protect you if you’re involved in an accident with a motorist who isn’t insured. This broader level of coverage typically costs more than liability.

Comprehensive coverage

The third type of auto insurance is comprehensive coverage. As its name suggests, comprehensive provides the broadest range of protection. Not only does it usually cover medical and collision-related damages, but it may also protect you in the event of theft and floods. But that comes at a cost, as comprehensive premiums are usually the highest among the three.

Specified perils and all perils

Two other optional types of auto insurance you might consider signing up for are specified perils and all perils. As its name implies, specified perils protects you against specific damage to your vehicle like theft or attempted theft, and weather-related damage, such as fire, lightning, windstorms and earthquakes. All perils combines the protection you receive under collision and comprehensive coverage.

It’s important to weigh the amount of coverage you need with the premium you’ll pay in order to find the auto insurance coverage that’s right for you. A lot of us like to shop for the auto insurance with the lowest premiums, but as the old saying goes, you get what you pay for. When shopping around, it’s important to also look at the amount of coverage you’ll receive to ensure it’s sufficient. The last thing you want is to end up paying a lot of money out of pocket if you ever need to file a claim.

Is auto insurance different from province to province?

Although auto insurance is mandatory for drivers in all provinces across the country, there are key differences depending on where you reside. For example, the rates you’ll pay for the level of coverage vary greatly from province to province.

For years Ontario has consistently had the highest auto insurance rates in the country.  Although it’s hard to pinpoint the exact reason why, reports have cited insurance fraud as the main reason. Meanwhile, Quebec has consistently had among the lowest auto insurance rates in the country over the years.

In most provinces, your only choice is to get auto insurance from private companies. That being said, there are some provinces that offer private and public auto insurance coverage. If you’re a driver in Alberta, New Brunswick, Newfoundland and Labrador, Nova Scotia, Ontario or P.E.I., your only option is buying auto insurance through private companies. If you live in B.C., Manitoba or Saskatchewan, you can get basic auto insurance coverage through the government, plus extra coverage from private companies.

Quebec is unique and falls into its own category. If you’re a driver in Quebec, public insurance protects you in the event of injuries or death, while private companies protect you for property damage.

What factors influence the cost of auto insurance?

If you’re anything like me, you may have a tendency to complain that your auto insurance premiums are too high. But your premium might make more sense if you understand how it’s calculated. Insurance companies set auto premiums based on a number of factors including your vehicle’s make and model, your driving history, your age, and gender.

Vehicle make, model and production year

Your vehicle’s make, model and production year has major bearing in premium costs. For example, sports cars are typically more expensive to insure compared to sedans. This boils down to two factors: sports cars not only tend to have a higher retail price, but they’re also more likely to be involved in a collision.

Driving history

Your driving history is another big factor. If you’re a very safe driver who’s never received as much as a speeding ticket, you could save thousands of dollars in auto insurance premiums compared to someone who has several speeding tickets and has been involved in collisions.

Demerit points

Incurring demerit points for driving infractions, such as dooring a cyclist and speeding, can impact the auto insurance premiums you’ll pay as well. Demerit points won’t affect your auto insurance premiums immediately, but they will when the policy comes up for renewal, as long as your insurance company checks your driving record.

Place of residence

A lot of motorists aren’t aware that where you live can have a big impact on their auto insurance premiums. Some neighbourhoods have a history of filing more car insurance claims than others. If your area has a lot of break-ins and collisions, be prepared to pay to for it. Although I’m not saying that auto insurance premiums should motivate you to move, it’s certainly something to be cognizant of.

Age and gender

Two more factors that influence car insurance premiums are the policyholder’s age and gender. Insurance is one of the few industries where companies can legally discriminate based on age and gender in pricing. All things considered equal, you’ll generally pay less for auto insurance the older you are. (At least until you hit your golden years, when you’ll be forced to fork over more for premiums.) Men generally pay higher auto insurance premiums than women, as men are known for exhibiting riskier driving behavior.

How can drivers minimize what they pay in auto insurance?

Who isn’t looking to pay less for your auto insurance? Here are some simple ways to cut down on what you pay and free up room in your monthly budget for savings or investing.

Bundle and save

Are you a homeowner? By bundling your home and auto insurance with the same insurance company, you can expect to receive a discount off both.

Raise your deductible

Your deductible is the amount that you’re required to pay out of pocket before your insurance company will chip in in the event of a claim. By choosing a higher deductible, you could save a substantial amount on your monthly premiums. Inquire with your insurance company and check out the deductible options you can choose.

Shop around and save

Many of us have our auto insurance on auto pilot; we’re too busy to allocate time toward shopping around and simply renew with our existing insurance company. While that may be convenient, it’s not necessarily cost effective. By shopping around, you’ll have the peace of mind that you’re getting a good rate and adequate coverage.

Where/how can drivers purchase auto insurance?

You can buy auto insurance from a licensed insurance broker, which is someone who offers insurance for a number of different insurance companies. The broker will research the market for you to find the insurance company with the coverage you’re looking for at the best rate.

Another choice is to use an insurance agent. An insurance agent typically represents a single insurance company, so after consulting an insurance agent it might still be a good idea to do your own additional research into possible alternatives to what the agent suggests. Similar to insurance agents are direct writers, who work for insurance companies that sell directly to consumers.

A third choice is to shop online on your own behalf. The upside to this is that you feel like you’re in the driver’s seat. The downside is that insurance can be complicated, so you’ll probably want to speak to a human being at some point.

Sean Cooper Freelance Contributor

Sean Cooper is the bestselling author of the book, Burn Your Mortgage: The Simple, Powerful Path to Financial Freedom for Canadians. He bought his first house when he was only 27 in Toronto and paid off his mortgage in just 3 years by age 30. An in-demand Personal Finance Journalist and Speaker, his articles and blogs have been featured in publications such as the Toronto Star, Globe and Mail and Financial Post.

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