Whether you drive a car, rent an apartment, or own a home, chances are good that you’ve had to think about insurance. But if you’ve ever questioned the ins and outs of the business, a basic understanding of the concept of insurance could be just what you need. Let’s breeze through an example, shall we?

Prepare for the worst, hope for the best

Insurance, in a nutshell, is planning for the worst-case scenario and hoping that it never happens. For example, imagine there’s an annual storm that blows through your Whispering Winds neighbourhood, affecting the 100 houses there. Every year at the same time and in the same place, the storm clouds roll in and one house ends up having its roof blown off — a repair that costs $10,000. Without insurance, every homeowner would have to worry about coming up with $10,000 on short notice if his or her house ends up without a roof. At the end of the year, 99 homeowners would be safe from damage and a hefty bill, while one homeowner would have to pay $10,000.

Spread out the risk, reduce costs

With insurance, Whispering Winds homeowners could join together to spread out the risk. If they created an insurance fund, all 100 homeowners could pay $100 at the beginning of the year. The $10,000 total would then go to the homeowner who lost their roof in the annual storm.

By spreading out the risk, each homeowner only has to set aside $100 each year instead of worrying about coming up with $10,000. Sure, if it’s not your house that loses a roof, you never get to use that $10,000. But most homeowners would consider that a fair trade and would rather spend $100 now to avoid a $10,000 repair bill later on.

Different risks = different rates

You might ask if it’s fair to have every homeowner pay the same $100 insurance premiumopens a pop-up with definition of premium. After all, Bill at 7 Squall Street had a new roof installed last year, and the manufacturer swears that it’s windproof. As well, Carole at 55 Breeze Boulevard has the best lot in the neighbourhood — a corner that’s protected by a retaining wall and trees. The chances of her roof blowing off are pretty slim compared to other homes around her.

And that’s where insurance underwriters come in. They are experts at assessing risks and assigning a fair price for insurance. If your risk factors are lower than other peoples’ risk factors, your rates will likely reflect it. And if your property poses a higher risk, you can expect to pay more to offset those risks.

It’s about more than your property

What if, during the annual storm at Whispering Winds, your fence blows over and lands on your neighbour’s car? Or someone visits just after the storm, slips on your wet walkway, and breaks their ankle? Without insurance, you could be held responsible for repairing the damages to your neighbour’s car or covering your friend’s recovery expenses. But if you had third-party liability coverage — which is included in most home and car insurance policies — those expenses would likely be covered. Insurance is about more than just protecting your physical property.

Protect what you value most

At the heart of insurance is the idea of paying a little bit to protect yourself now so you can avoid a larger expense later on. So the next time you’re considering buying insurance, remember what you’re really doing — buying peace of mind in the event of a loss. A licensed insurance broker can help you understand your options and find the right coverage to suit your needs.

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