Insurance Myths and Truths – Explained

Tyler Wade
by Tyler Wade March 26, 2019 / No Comments

If you know the rules well, you can break them effectively. If you know how insurance works, you can maximize your savings. At Ratehub.ca, our mission is to ensure you understand your insurance coverage so you don’t get hit with a costly disaster bill or overpay on your existing premiums. We hope to educate Canadians to make better choices on their finances with thought-provoking and informative content, as well as interactive calculators providing everyone with personalized results for their unique situation.

Today, we launched our car and home insurance quoting engines in Ontario. We designed them to allow you to compare quotes from several different insurance companies in just a few minutes. We provide tips throughout the process, educating everyone about why a particular question is being asked of you and how it might affect your rate.

While we were building it, through user feedback, we found a lot of misconceptions about how insurance companies decide on pricing for car and home insurance. This article aims to provide clarity on insurance myths regarding home and car insurance and to give you actionable advice you can use to make the best choice for your insurance needs.

We asked over 1,000 Canadians what factors they believe affect their car insurance.

Which of the following factors do you think impacts the price you pay for car insurance?
My driving record 88%
The year, make, and model of my car 82%
My age 70%
My postal code (where I live) 61%
How frequently I drive 58%
My gender 54%
The number of parking tickets I have 36%
The colour of my car 22%
My credit score 16%
My salary, net worth, and assets 8%

Let’s break this down to better understand the truths, falsehoods, and the reasons behind them.

CAR INSURANCE MYTHS

Car Insurance Myth #1: The colour of your car affects the price you pay for car insurance

Over 1 in 5 Canadians thought this to be true, but the colour of your car has no impact on your car insurance premium. This particular myth is based on the stereotype of a fancy car – a Lamborghini or Ferrari is often red. You’ll pay more for the sports car because it’s more expensive and considered to be a higher risk (i.e. speeding), not because of its colour.

Car Insurance Myth #2: The number of parking tickets you have affects your car insurance premium

Over 60% of Canadians knew this to be a myth, which is great. The number of parking tickets you get doesn’t affect your premium. However, not paying them could result in your driver’s license getting suspended. A license suspension may show up on your record, which your insurer uses to determine your rates, increasing your premium.

Car Insurance Myth #3: Your salary, net worth, and assets affect the price you pay for car insurance.

93% of Canadians knew this to be a myth, and they’re right. A larger salary may afford you a nicer car which would cost you more to insure, but your salary, net worth, and assets have no effect on your insurance premium.

CAR INSURANCE TRUTHS

Car Insurance Truth #1: Yes, your postal code does affect the price you pay for car insurance.

39% of Canadians said it does not, but it’s true. In fact, In October of 2018, there were private members’ bills put forward at Queen’s Park to end postal code discrimination in Ontario.  
The bills were not passed because a postal code is a statistic that car insurance providers say has a direct link to claims. Brampton drivers pay the most for car insurance in Canada because it’s also the area where the most claims are submitted – the more claims in a given area, the higher the insurance premium.

Car Insurance Truth #2: Yes, the year, make, and model of your car affects the price you pay for car insurance.

Over 80% of Canadians thought this to be true, and it is. Unsurprisingly, insuring a $200,000 Ferrari will cost more to insure than a used $15,000 Honda Civic. The cost to repair or replace a specific vehicle is a significant factor when determining your premium. Diving deeper, the Insurance Bureau of Canada puts out a yearly list of the top 10 most stolen cars in Canada. The Ford F350 took 6 spots in 2018. Insurers will also look at this information and adjust their rates accordingly. The higher the risk associated with a particular car, the more it will cost to insure.

Car Insurance Truth #3: Yes, your driving record affects the price you pay for insurance.

Nearly 9 in 10 Canadians knew this to be true and it makes sense – the riskier the driver you are, the more you’ll pay for car insurance. If you’re fully or even partially at fault in an accident, an insurance company will usually increase your premiums at your next renewal date. In fact, if you’re at fault while under the influence it can even lead to the cancellation of your policy.

Car Insurance Truth #4: Your credit score does not affect the price you pay for car insurance.

Well, the truth is it varies by province, but even still, it’s murky. The official stance from the FSCO, Ontario’s regulatory body for car insurance, is that your credit history is not a factor that can be used. Insurance companies argue there is a strong correlation between a driver’s credit score and an increased risk for insurance claims and have gone to great lengths to use it as a rating factor. For now, this is something drivers don’t need to consider when shopping for Ontario car insurance quotes.

Newfoundland joined Ontario in banning the use of a credit score to calculate your premium.  Alberta allows for its use but requires explicit consent from the driver. In B.C. and Manitoba, it’s not mandated, but also not an issue since the government both regulates and sells the basic mandatory insurance policies. In Nova Scotia, the insurer can decide whether or not to use your credit history. As a general rule, it’s important to know your own province’s rules and regulations when shopping for car insurance.

Car Insurance Truth #5: Yes, your age affects the price you pay for car insurance.

A younger driver, without much driving experience on the road, without any driving history to prove they’re a safe driver, will pay more for car insurance. The perceived risk is higher. The best way to reduce your premiums as a new driver is proof of a completed driver’s education course, and maintaining a clean driving record always helps.

Car Insurance Truth #6: Yes, your gender affects the price you pay for car insurance.

The gender divide was more pronounced in years past, but on average men still pay more for car insurance. They are more likely to drive without seat belts, they typically drive at faster speeds, and ultimately they are more likely to get into accidents. While overall, death by motor vehicle has been on a downward trend since 1980, Statistics Canada showed that between 2008 and 2012 more men (8,456) died in car-related accidents than women (3,561).

Car Insurance Truth #7: Yes, the more you drive, the more you’ll pay for car insurance

Honesty is important when inputting your car insurance details. The more kilometres you drive (i.e. longer commutes) the more you’ll pay because of the increased likelihood of an accident occurring. Telematics is a device or an app that some insurers offer as a way to track your driving. If the distance you drive goes down, your savings go up.

Car Insurance Myths Debunked

Hopefully, shedding some light on these myths and truths help you better shop for car insurance quotes when it comes time. Another way to reduce the amount you pay for car insurance is by bundling it with your home insurance.

With that in mind, we asked those same 1,000 Canadians what factors affect their home insurance to further test their knowledge as it relates to their house, condo, and even if they’re renting. Here’s what we found.

Which of the following factors do you think impacts the price you pay for home insurance?
The size of my home 84%
The age of my home 74%
My postal code (where I live) 72%
The materials my home is constructed out of 66%
The proximity of my home to the nearest fire station or fire hydrant 65%
Whether I have a fireplace 65%
The value of the possessions in my home 63%
The cost to rebuild my home 62%
Whether I have a pool 58%
Whether I rent out my home via short-term accommodation services like Airbnb 54%
My age 17%
My credit score 16%
My gender 11%
My salary, net worth, and assets 10%

Again, let’s break down these home insurance results and look at common myths, curiosities, and the ultimate truth of how your house or condo insurance premium is calculated.

HOME INSURANCE MYTHS

Home Insurance Myth #1: Renting out your home via short-term accommodation services like Airbnb does not affect the price you pay for home insurance

Almost half of Canadians (46%) said renting out their home would not impact the price they pay for home insurance, but it absolutely does. First and foremost, if you put your house up on a short-term rental market without informing your insurance provider, you could be in violation of your insurance policy. Updates or material changes to your policy always need to be communicated to your provider so they better understand their risks and rate you accordingly. Currently, there are only a select few providers that offer insurance for Airbnb. While Airbnb does offer its own insurance, it may not be enough to cover the potential damages and losses. It also doesn’t absolve you from your obligation to inform your personal insurer. Before you rent, speak with your provider, you want to be certain you are covered should you need it.

Home Insurance Myth #2: Your salary, net worth, and assets affect the price you pay for home insurance.

Over 90% of Canadians knew this had nothing to do with their home insurance premium, which is true. Mind you, there are limits put on things like jewellery and rare art. If you have a collection of either, it would be wise to take out an endorsement, or coverage add-on to your existing policy to cover the full extent of your collection.

Home Insurance Myth #3: Age and Gender affect the price you pay for home insurance

Age and gender have nothing to do with the price you pay for home insurance and only 17% of survey respondents thought this to be true. If you live alone, or with a spouse, or with children

– your home insurance premium remains the same. Though keep in mind, over that length of time, there may be other factors that affected the price you pay for home insurance – like major renovations, upgrades, additions, or new exterior structures.

HOME INSURANCE TRUTHS

Home insurance Truth #1: Your postal code does affect the price you pay for home insurance

More than 1 in 4 Canadians thought a postal code does not affect your home insurance premium, but in fact it does. Living in an area where theft or vandalism is common will increase your premium. Also, an area more prone to flooding will raise your rates and may even require a special endorsement, like overland water, to be added to your policy. If you live on the west coast, there are other endorsements you could add to your BC home insurance quotes like earthquake coverage and mass evacuation, covering you for any expenses while you can’t be in your home.

Home Insurance Truth #2: The size of your home does affect the price you pay for home insurance

Over 80% of Canadians knew this one was true. To further clarify, the price you pay for your home does not necessarily affect your home insurance. In a hot real estate market, a smaller home may go for over $1 million, but if it’s only 1200 sq. ft., you’re only paying for the cost to rebuild (i.e. replacement cost) and its contents for that size of a home.

Home Insurance Truth #3: The construction materials used in your home does affect the price you pay for home insurance.

34% of Canadians said constructions materials used in their home would not affect the price, but it does. If your home is clad in cedar wood, it will cost more to insure than one clad in aluminum siding. Wood doesn’t last as long and is difficult to maintain – which can lead to other problems like insect infestation or exterior water entering your home. Also, wood catches fire far easier than aluminum.

Home Insurance Truth #4: The value of possessions in your home does affect the price you pay for home insurance

The contents coverage on a comprehensive home insurance policy insures your possessions against theft or damage from vandalism, flood, or fire. It usually covers all of the items you own like your furniture, clothing, and electronics. However, it’s important to know that each insurance company sets its own contents coverage limits on your stuff, so shop around for house insurance quotes with the coverage that suits your needs.

With tenant insurance, you define the limit of coverage you want for your contents and pay for it accordingly. Know that your insurance provider may want a credit check and even receipts to avoid fraud attempts.

You may want to ask about purchasing extra coverage for valuable items like jewellery, bikes, electronic equipment and art. The insurance provider will want receipts or appraisals for valuable items. It’s a good idea to provide photos and video of the contents of your home, as well as doing a yearly contents inventory to keep your coverage up to date.

Home Insurance Truth #5: The proximity of your home to the nearest fire station or fire hydrant affects the price you pay for home insurance

35% of Canadians didn’t know the proximity to a fire hydrant or fire station would help reduce their home insurance premium. The faster it is to put out a fire, the more salvageable the house, and the lower the amount you need to claim, so your home insurance will be cheaper.

Home Insurance Truth #6: The cost to rebuild your home does affect the price you pay for home insurance

Almost 40% of Canadians thought this did not affect the price, but it does. It’s listed in your home insurance policy and it’s vital you know the amount. If you bought your house for $800,000, that is the market value, but not the cost to rebuild. You can save money on your home insurance policy by making sure you’re only charged for the cost to rebuild. Your $800,000 home may only be half of that to rebuild. Don’t over insure yourself, and only pay for what you need. You can seek the advice of a few contractors with rough estimates on how much it would cost to totally demolish and rebuild your home or get some online home insurance quotes from Ratehub.ca. Our quoter will generate you a replacement cost of your property using industry approved tools and databases.

Home Insurance Truth #7: The age of your home does affect the price you pay for home insurance

74% of Canadians knew the older the home is, the more likely you are to submit a property claim, such as damage caused by a worn-out roof or crumbling foundation. If you update your roof, re-support your foundation or fix any ageing issues, give your insurance agent a call and see if you can receive a reduction on the price you pay. Do you need home insurance for a renovation? Yes, so make sure you communicate your intentions to your provider.

Home Insurance Truth #8: Having a fireplace in your home affects the price you pay for home insurance

65% of Canadians knew a fireplace increases your home insurance premium. It should come as no surprise that having an open flame in your home will raise your premiums.  The sparks increase the chance your insurance provider will have to pay a claim and therefore you will pay more for home insurance. It’s important to note that the type of fireplace you have will also impact the price you pay. Read all about how a wood stove affects the price you pay for home insurance.

Home Insurance Truth #9: Yes, if you have a pool, it will increase the price you pay for home insurance.

Having a pool is expensive to maintain on its own, and premiums will often increase because you’re asking your insurer to take on more risk for both damages to the pool and for accidents it may cause.  Over 40% of Canadians didn’t know a pool would affect their home insurance premium. Many municipalities require a fence around the pool to protect children from entering without supervision. Read more about how installing a pool affects the price you pay for home insurance.

Home Insurance Truth #10: Yes, your credit score can affect the price you pay for home insurance.

4 out of 5 Canadians weren’t aware that a credit score could affect your home insurance premium. Here’s the thing – your credit score doesn’t necessarily increase the price you pay for home insurance, but supplying your credit score can help you save up to 25% on your home insurance, depending on the provider and your score. The better the score, the more you could save.

Here’s when you might need extra insurance coverage

Endorsements, an industry term for an add-on to your insurance policy, are a great way to customize your home insurance policy. Our survey asked participants what they knew about a few specific endorsements and here’s what we learned.

If you run a small business out of your home, it would be completely covered by most home insurance policies.
TRUE 7.31%
FALSE 49.30%
I DON’T KNOW 43.39%

Only 7% of Canadians thought running a business out of your home is completely covered by a standard home insurance policy – which is not true.. A home insurance policy has limits on the necessary tools you’ll need for a business, profession or occupation. If you plan to operate a business from your home, be sure to speak with your insurance provider to obtain additional coverage to mitigate your risks.

For instance, if you’re running a daycare out of your home, that’s a major liability risk that regular home insurance wouldn’t cover. You would need commercial liability to cover damages for, say, a parent slipping and falling on your property or an injured child as a result of a small fire.

Make sure you communicate your home business intentions to your provider. It’s best both parties be informed to properly assess risk and make sure you have the coverage required for all potential scenarios.

The total value of your jewellery or fine art is typically covered by home insurance policies.
TRUE 22.49%
FALSE 50.80%
I DON’T KNOW 26.71%

22% of Canadians said the total value of their jewellery or fine art would be covered by most home insurance policies, while another 27% said they weren’t sure. The reality is even though a comprehensive home insurance policy covers these things, there are coverage limits placed on them and the amounts vary between providers. Your best bet is to itemize your collection, place a value on it, and take out a special endorsement to be fully protected against theft or damage. Your home insurance provider will likely require appraisals or receipts to protect themselves against fraud.

If your home is flooded, all damages and losses would be covered under most home insurance policies. Examples of types of damage would include sewer backup, extreme weather events such as hurricanes, overland water, etc.
TRUE 26.80%
FALSE 50.42%
I DON’T KNOW 22.77%

27% of respondents said if their home was flooded, all damages and losses would be covered under most home insurance policies. Another 23% said they weren’t sure. To clarify, most comprehensive home insurance policies only cover you for flooding from a burst pipe in your home, but not against rising rivers, heavy rains, or sewer back up. Climate change has increased the popularity of endorsements like overland water and sewer backup due to how often they’re occurring. If you live in a low-lying area with a high water table, or near a large body of water, or if your home doesn’t have proper waterproofing, you might consider adding water endorsements to your policy.

INSURANCE MYTHS – THE BOTTOM LINE

Knowing is half the battle. If you know the rules, you’re a more informed buyer. We hope this article allows you to choose better insurance for your needs and hopefully even save you some money.

Know that insurance companies are typically trying to raise their rates every year. As the cost of claims goes up, they need to raise premiums to help manage their bottom line. This is why you shouldn’t idle and let yourself be renewed automatically. You should shop and compare insurance quotes a few months before your insurance is up, so you know what the average price you should be paying. If you find a better deal, don’t be afraid to switch.  A few hundred dollars a year can go a long way – that’s the truth.

Image by gusaap from Pixabay