What Is an Insurance Premium?
An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance. Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy.
- An insurance premium is the amount of money an individual or business must pay for an insurance policy.
- Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.
- Failure to pay the premium on the part of the individual or the business may result in the cancellation of the policy and a loss of coverage.
- Some premiums are paid quarterly, monthly, or semi-annually depending on the policy.
- Shopping around for insurance may help you find affordable premiums.
How an Insurance Premium Works
When you sign up for an insurance policy, your insurer will charge you a premium. This is the amount you pay for the policy. Policyholders may choose from several options for paying their insurance premiums. Some insurers allow the policyholder to pay the insurance premium in installments—monthly or semi-annually—while others may require an upfront payment in full before any coverage starts.
The price of the premium depends on a variety of factors, including:
- The type of coverage
- Your age
- The area in which you live
- Any claims filed in the past
- Moral hazard and adverse selection
There may be additional charges payable to the insurer on top of the premium, including taxes or services fees.
For example, in an auto insurance policy, the likelihood of a claim being made against a teenage driver living in an urban area may be higher than a teenage driver in a suburban area. In general, the greater the risk associated, the more expensive the insurance policy (and thus, the insurance premiums).
In the case of a life insurance policy, the age at which you begin coverage will determine your premium amount, along with other risk factors (such as your current health). The younger you are, the lower your premiums will generally be. Conversely, the older you get, the more you pay in premiums to your insurance company.
How Premiums Are Calculated
Insurance premiums may increase after the policy period ends. The insurer may increase the premium for claims made during the previous period if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.
Insurance companies generally employ actuaries to determine risk levels and premium prices for a given insurance policy. The emergence of sophisticated algorithms and artificial intelligence is fundamentally changing how insurance is priced and sold. There is an active debate between those who say algorithms will replace human actuaries in the future and those who contend the increasing use of algorithms will require greater participation of human actuaries and send the profession to a “next level.”
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. They may also invest in the premium to generate higher returns. This can offset some costs of providing insurance coverage and help an insurer keep its prices competitive.
While insurance companies may invest in assets with varying levels of liquidity and returns, they are required to maintain a certain level of liquidity at all times. State insurance regulators set the number of liquid assets necessary to ensure insurers can pay claims.
Most consumers find shopping around to be the best way to find the cheapest insurance premiums. You may choose to shop around on your own with individual insurance companies. And if you are looking for quotes, it’s fairly easy to do this by yourself online.
For example, the Affordable Care Act (ACA) allows uninsured consumers to shop around for health insurance policies on the marketplace. Upon logging in, the site requires some basic information such as your name, date of birth, address, and income, along with the personal information of anyone else in your household. You can choose from several options available based on your home state—each with different premiums, deductibles, and copays—the policy coverage changes based on the amount you pay.
The other option is to try going through an insurance agent or broker. They tend to work with a number of different companies and can try to get you the best quote. Many brokers can connect you to life, auto, home, and health insurance policies. However, it’s important to remember that some of these brokers may be motivated by commissions.
What Do Insurers Do With the Premimums?
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. Some insurers invest in the premium to generate higher returns. By doing so, the companies can offset some costs of providing insurance coverage and help an insurer keep its prices competitive within the market.
What Are the Key Factors Affecting Insurance Premiums?
Insurance premiums depend on a variety of factors including the type of coverage being purchased by the policyholder, the age of the policyholder, where the policyholder lives, the claim history of the policyholder, and moral hazard and adverse selection. Insurance premiums may increase after the policy period ends, or if the risk associated with offering a particular type of insurance increases. It may also change if the amount of coverage changes.
What Is an Actuary?
An actuary assesses and manages the risks of financial investments, insurance policies, and other potentially risky ventures. Actuaries assess particular situations financial risks, primarily using probability, economic theory, and computer science. Most actuaries work at insurance companies, where their risk-management capabilities are particularly applicable in determining risk levels and premium prices for a given insurance policy.
How to Calculate Insurance Premiums
If you have an insurance policy, you might wonder how companies calculate your insurance premiums. You pay insurance premiums for policies that cover your health—and also your car, home, life, and other valuables. The amount you pay is based on your age, the type of coverage you want, the amount of coverage you need, your personal information, your zip code, and other factors.
- An insurance premium is the amount of money you pay for an insurance policy.
- You pay insurance premiums for policies that cover your health, car, home, life, and others.
- Insurance premiums vary depending on your age, the type of coverage, the amount of coverage, your insurance history, and other factors.
- Premiums can increase each time you renew an insurance policy.
What Is an Insurance Premium?
When you have an insurance policy, the company charges you money in exchange for that coverage. That cost is known as the insurance premium. Depending on the insurance policy, you might pay the premium each month or on a semi-annual basis. In some cases, you might be required to pay the full amount upfront, before coverage starts.
Most insurance companies offer a variety of ways to pay your bill, including online options, automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and bank drafts. You may qualify for a discount if you sign up for paperless billing options or if you pay the full amount all at once instead of making minimum payments.
How Much Is an Insurance Premium?
There’s no set cost for insurance premiums. You could have the same car as your neighbor and end up paying more (or less) for insurance—even with the exact same coverage. It pays to shop around and compare prices and policies.
You’ll pay more for “better” coverage. For example, a health insurance policy with a $1,000 deductible will be pricier than one with a $5,000 deductible. Similarly, a car insurance policy with a $0 deductible will be more expensive than a policy with a $500 one, all other factors being the same.
Still, that doesn’t mean you should automatically go for the cheapest policy, just to save money. It’s essential that you consider your situation—and the likelihood that you’ll need to use that policy—when choosing the plan that will work best for you.
How to Calculate Insurance Premiums
Insurance companies consider several factors when calculating insurance premiums:
- Your age. Insurance companies look at your age because that can predict the likelihood that you’ll need to use the insurance. With health insurance, younger people are less likely to need medical care, so their premiums are generally cheaper. Premiums increase as people age and have a higher chance of needing more medical services. And teenage drivers are still working on building experience, so they’re more expensive to insure. Likewise, older drivers—who tend to have slower reflexes—will also pay more.
- The type of coverage. In general, you have several options when you buy an insurance policy. The more comprehensive coverage you get, the more expensive it will be. For example, if you have an auto insurance policy that covers liability only, it will be cheaper than if you have a plan with collision, comprehensive, liability, medical payments, and uninsured/underinsured motorist coverage.
- The amount of coverage. The less coverage, the cheaper the premiums—no matter what you’re insuring. If you buy health insurance, for example, you’ll pay lower premiums for the same type of coverage if you have a higher deductible and higher out-of-pocket maximum. Similarly, it will cost more to insure a $400,000 home than a $200,000 home.
- Personal information. Depending on the type of insurance you’re shopping for, the insurance company may take a close look at things like your claims history, driving record, credit history, gender, marital status, lifestyle, family medical history, health, smoking status, hobbies, job, and where you live.
- Actuarial tables. Most insurance companies employee actuaries, who are business professionals that assess the risk of financial loss using mathematics and statistics to predict the likelihood of an insurance claim, based on much of the aforementioned criteria. They typically produce something called an actuarial table that is provided to an insurance company’s underwriting department, who uses the input to set policy premiums.
95% the percentage of car insurance companies that consider credit ratings when calculating insurance premiums.
How to Lower Your Premiums
Insurance companies are all about risk assessment. The higher the risk, the higher the premiums. Still, there are ways to lower your premiums.
One way is to “bundle” your insurance. For example, if you have your auto, home, and life insurance policies with one company, you’ll probably qualify for a discount.
Of course, you can save money if you reduce your coverage (e.g., increase your deductible); however, that’s not always a good choice. Consider your situation and the likelihood that you’ll use the policy before making any decisions.
There are other ways to save on your premiums, too, but they take more of a commitment. For instance, most states charge smokers up to 50% more than non-smokers for health insurance policies. As an example, if you’re a smoker paying $600 a month for health insurance, you might be able to reduce your premium to, say, $400 if you quit smoking.
Another example: You may qualify for lower auto insurance rates if you improve your credit score. That’s because people with lower credit scores are, statistically speaking, more likely to file a claim.
Car insurance premiums
Auto insurance premiums are often based on your age, driving record, claims history and vehicle, as well as the amount of coverage you buy.
In general, you’ll pay the highest premiums for full coverage, which includes liability, comprehensive and collision insurance. When shopping for a policy, compare auto insurance options to find the best rate.
Life insurance premiums
Insurers typically use your age and medical history when calculating life insurance premiums. Other factors, such as your credit history, the amount of coverage you buy and your employment status, can impact the price.
Among the different types of life insurance, permanent policies such as whole life insurance are the most expensive, as coverage lasts your entire life. In contrast, term life insurance covers a set period of time, such as 10 or 20 years.
Renters insurance premiums
On average, renters insurance premiums are between $15 and $30 a month, according to the National Association of Insurance Commissioners. The price of your premiums is based on specific details, such as the value of your belongings, whether the building has a burglar alarm, and how close the property is to fire protection services. Shop around for renters insurance quotes before buying a policy.
Homeowners insurance premiums
The average homeowners insurance premium was $1,211 a year in 2017, according to the latest data from the NAIC. Homeowners insurance premiums are based on a variety of factors, such as the building’s location and value, your credit score, your claims history and the amount of coverage you want to buy.
Factors That Impact Insurance Premiums
Several factors influence how much you pay in premiums. While some factors are policy specific, others are based on you—the policyholder—or the characteristics of the assets you’re insuring.
Here are a some common pricing factors for homeowners and car insurance:
- Coverage limits
- Deductible amount
- Past claims
Auto Insurance Premium Pricing
Factors that influence your auto insurance premium include:
Age. Drivers under age 25 generally pay among the highest rates, even with a good driving record. Rates start to drop after age 25.
Driving history. Traffic violations and accidents will often cause rates to increase at renewal time.
Type of car. Your vehicle choice will impact rates because insurers will look at claims made by owners of the same model. Also, your vehicle’s value affects the cost of collision and comprehensive insurance. These coverage types pay for repairs—or the value of a vehicle that’s been totaled—due to accidents, theft, fire, collisions with animals and other problems.
Miles you put on your car. Having lower mileage every year can put you in a lower rate category.
ZIP code. Where you park your car and where you live impacts how much you pay for insurance. For example, if you live in an area prone to theft and vandalism and leave your car on the street, you’ll probably have to pay more for coverage than someone who lives in a low-crime city and parks their car in the garage.
Credit. Depending on where you live, insurers may look at your credit-based insurance score and charge more if you have a poor score.
Past claims. Drivers who cause accidents or make claims will likely see rates rise at renewal time, because they are now seen as riskier customers. Not all accidents make rates go up.
Home Insurance Premium Pricing
Factors that influence a homeowners insurance premium include:
Age and condition of the home. Older, vintage homes may cost more to insure since they may require costly materials to rebuild them back to its original condition.
ZIP code. Some states and cities are simply more vulnerable to frequent and/or expensive claims, which affects the rates for everyone in the area.
The cost to rebuild a home. Your dwelling coverage is based on the cost to rebuild the house in the event of a big disaster, like a large fire or tornado. The building materials and additional features of a home can increase the coverage price. For example, a home with a tile roof may cost more to rebuild than an asphalt roof.
Additional risks. Pools, trampolines and even dogs can increase your insurance cost.
Valuables. While a home insurance policy includes coverage of the contents inside, you may need to buy additional insurance for expensive items like jewelry.
Safety and security devices. Installing security systems, alarms or other safety devices such as smoke detectors can lead to an insurance discount.
Credit and past claims. Like auto insurance, credit can be a factor in home insurance premiums, as will past claims.
Renters Insurance Premium Pricing
Factors that influence renters insurance premiums include:
Coverage amount. Your renters insurance coverage amount will be based on the value of the belongings you want to insure. For example, in some cases $20,000 is sufficient to replace your belongings in the event of a disaster. If you own a lot of furniture, decorations and clothing, you’ll need far more coverage.
ZIP code. Risks vary depending on your rental location. For example, urban areas may have higher renters insurance rates because of higher crime rates.
Credit and insurance history. Past claims and poor credit can cause higher rates.
Life Insurance Premium Pricing
Factors that influence life insurance premiums include:
Age. Life insurers look at life expectancy when pricing a policy. The younger you are, the lower your rates will be compared to someone older who’s in the same health.
Gender. Since women tend to live longer than men they enjoy lower rates.
Health. Your weight, medical history and family medical history (parents and siblings) play a significant role in life insurance premiums. Anything that potentially reduces your life expectancy can mean a higher rate.
Lifestyle. A criminal record, history of DUIs or speeding, or a hazardous occupation like a pilot will often factor into life insurance premiums. Credit is also a factor that some insurers use in risk scores.
Policy type. Term life insurance is designed to protect you for a certain amount of time, such as 10, 20 or 30 years. It’s the most affordable type of life insurance. Forms of permanent life insurance cost more because they can stay in-force no matter when you die and often have a cash value component.
Pet Insurance Premium Pricing
Pet insurance is like health insurance for a pet. Pet insurance premiums consider these factors:
Age. When a pet is younger, they are less prone to illness or injury, so pet insurance rates rise as pets get older.
Breed. Some breeds are more predisposed to hereditary conditions than others, increasing the insurance risk and impacting your rate. Also, coverage for dogs is usually more expensive than for cats.
Gender. Insurance data shows that pet parents submit more claims for male pets than for females, so some insurers charge slightly more for male pets.
ZIP code. Because veterinarian costs vary by location, pet insurance costs will differ as well. If you live in a big city, for example, you can usually expect to pay more for coverage.
Travel Insurance Premium Pricing
Factors that influence your travel insurance premium include:
Age. Age can affect the likelihood you’ll submit a travel insurance claim, with older travelers submitting more claims.
Trip cost. The amount of trip cost you’re insuring is also a primary factor in travel insurance premiums. You want to insure the amount you would lose in pre-paid and nonrefundable deposits.
How the deductible affects an insurance premium
Except for life insurance, almost all insurance policies come with a deductible. That’s the portion of the damages (or services if we’re talking about health insurance) you have to pay out of your own pocket before your coverage kicks in. The higher your deductible is, the lower your premium is—and vice versa. So, having a higher deductible is a great way to lower your insurance premiums.
How high should your deductible be to keep your premium low? For health insurance, having a high deductible health plan (HDHP) combined with a health savings account is the best way to save on your premium. For car insurance or homeowner’s insurance, having a $1,000 deductible is a good place to start. That’s because the first step in getting control of your money is saving up a $1,000 emergency fund.
But, beyond that, you’ll probably need to do a break-even analysis to see what really makes sense for you. Let’s say your car insurance premium is $1,200 per year with a $250 deductible and bumping it up to a $1,000 deductible drops your premium to $700. That means that for taking on a bigger risk of $750, you’d save $500.
If you don’t have a lot of claims, you’d make back that $750 in two years. But let’s say your premium only goes down to $1,100. It would then take you more than seven years without a claim to break even, so you’d be better off keeping your lower deductible.
Another thing to consider is how often you have to file a claim. Unfortunately, there are a lot of poor drivers out there and, if you’re unlucky enough to run into them (pardon the pun), you’ll want to keep that lower deductible.
Definition of ‘Premium’
Definition: Premium is an amount paid periodically to the insurer by the insured for covering his risk.
Description: In an insurance contract, the risk is transferred from the insured to the insurer. For taking this risk, the insurer charges an amount called the premium. The premium is a function of a number of variables like age, type of employment, medical conditions, etc. The actuaries are entrusted with the responsibility of ascertaining the correct premium of an insured. The premium paying frequency can be different. It can be paid in monthly, quarterly, semiannually, annually or in a single premium.
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