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What Are Premiums, Limits, And Deductibles In Insurance In Canada? 

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Confused between understanding what are premiums, limits, and deductibles in insurance in Canada? Read this article to understand.

Insurance in Canada

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It is indeed confusing to decode so many terms and things. The “Insurance” industry is tough to understand primarily due to its unique terminology and baffling terms & conditions. However, you cannot escape as insurance is a need, and it can help you lead a peaceful life. Understand everything about the “Limits,” “Premiums,” and “Deductibles” in the simplest of language through this article.  

What do you mean by “Premium” or “Insurance Premium”?  

What does an insurance company do?  

It monetarily compensates you and gives you or your nominees “money” upon the occurrence of a specific event in the future. For example, if you have taken a life insurance policy, then your nominated family members will receive death benefits in the event of your demise.  

Will an insurance company pay you for taking nothing? Well, you know the answer, and it is a big NO.  

An insurance company works on a model where:  

  • It collects a specified sum of money periodically (monthly, quarterly, half-yearly, or annually) from you and in return  
  • It assures you that for any unexpected, covered event (for example, death of the policyholder, inability to pay the mortgage because of disability or critical illness, hospitalization, etc.), you or your designated members will get all the associated expenses/ claims.  

We know a specified amount collected by the insurance company from its policyholders as “Premium.” It acts as the cost of the provision of services and coverage.  

You will be required to pay this “premium” for the entire length of the period, which is in your insurance policy.  

Features of Insurance Premium  

  • Varies in Quantum: Different insurance policies have different insurance premiums, the calculation of which depends upon several factors, such as:  
    • The age of the policyholder  
    • The sum assured, or what you will get upon meeting a fortuitous event.  
    • The nature of coverage or the type of event covered.  
    • The income prospects of the policyholder  
    • How likely that the policyholder will make claims?  
    • The level of competition among the insurance companies in the area where the policyholder lives  
  • Types of Premiums: Typically, you can divide a policy premium into two broad categories, which are:  
    • Fixed Premium: You will pay a fixed and constant premium for the entire length of your policy  
    • Flexible-Premium: The premium varies, and changes based on the several conditions mentioned in the insurance policy.  
  • Who calculates Insurance Premium? Insurance companies employ actuaries. They calculate an insurance premium “limit” in a pretty uncomplicated way.  
  • You visited an insurance company’s office and enquired from them about a health insurance policy.  
  • They asked you how much money you want from us if you get hospitalized?  
  • You said $50,000  
  • They gave you a relevant insurance policy and told you that:  
    • If you incur anything over and above $50,000, we will not be able to compensate it.  
    • If you purchase this policy, then your “coverage” will be worth $50,000  
    • We will cover all your bills up to this limit; however, you will need to bear all the additional expenses (more than $50,000) from your pocket. 

This amount set by the policyholder is nothing but his “limit,” and an insurance company is not bound to pay anything above it.  

Hence, a “limit” determines how much money you will get from the insurance company upon meeting of a covered event.  

Insurance limits

Features of Insurance Limit  

  • Varies in Association with Premium Paid: “Premiums” and “Limits” maintain a direct relationship. The higher the limit you want to get, the higher the amount of premium you will pay.  
  • There can be different limits in a single insurance policy: If your insurance policy covers various events, then there is a possibility that each event has a different “limit” attached to it. For example:  
    • You purchased a Comprehensive Car Insurance Policy. 
    • It covers:  
      • Damages sustained by your car  
      • The damage sustained by the other party’s car and  
      • Personal accident cover for you  
    • The “limits” or the maximum amounts can differ for these three different coverages.  
  • Reduced by Deductions: As the conditions in the insurance policy, you usually do not get the entire amount mentioned in your limit. This amount usually gets reduced by some compulsory deductions, known as deductibles (explained below).  

What do you mean by “Deductibles” or “Insurance Deductibles” in Simple Language?  

You got to sacrifice in life. Well, this applies to the insurance industry as well. A deductible refers to the amount not covered by the insurance company, and you need to pay for it from your pocket.  

For example:  

  • You bought a health insurance policy, which offers you a total limit or total cover of $35,000  
  • The deductibles associated with this policy are $750  
  • Unfortunately, you fell ill and got admitted to a hospital.  
  • You got a hospital bill worth $24,000  
  • In the instant case:  
    • Your insurance company will pay you $23,250 ($24,000−$750), and
    • You will pay the quantum of deductibles, which is $750 from your pocket  

Hence, you can understand that “Deductibles” represent a pre-determined amount, which you need to bear from your funds. An insurance company will always deduct these expenses from your final claim.  

Comparison of Premiums, Limits, and Deductibles

Briefly – Comparison of Premiums, Limits, and Deductibles 

S. No. Parameters of Difference Premiums Limits Deductibles 
1. What Do They Represent? Represents a periodical amount that you pay to an insurance company Represents the maximum amount that an insurance company will pay you upon materialization of an event Represents a fixed deduction, which will be reduced from your claim 
2. How Is Their Quantum Related To Each Other? Quantum depends on the limit.  The higher the limit, the higher the premium. Quantum depends on the premium.  The higher the premium, the higher the limit. Quantum depends on the coverage/ limit. The higher the limit, the higher the deductible. 
3. When to Pay? Periodically  Upon the occurrence of a covered event Upon the occurrence of a covered event 
4. Who Pays? Policyholder Insurance Company Policyholder 
5.  Is There Any Compulsion? Yes, a policyholder will pay a “premium,” or the insurance policy will lapse. Yes, an insurance company is legally and contractually bound to compensate the policyholder as per the terms and conditions of the insurance policy. Yes, a policyholder is compulsorily required to bear the cost of deductibles. 
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