What Is An Insurance Premium?
An insurance premium is how much money you pay for an insurance policy. “Premium” is synonymous with the “price”. You might also hear people call it the insurance rate or cost.
How much you pay each time you get billed (e.g. monthly, annually, or quarterly) for a certain type of insurance will be the premium for that coverage.
How Insurance Premiums Work
Premiums may be paid monthly, semiannually, or annually depending on what policy you pick. It is calculated based on a large number of factors.
There is often a base calculation used to find the standard insurance premium, and then the insurance company will use other factors to see whether to increase or decrease an individual’s particular premium.
Naturally, you want an insurance premium that is cheaper. You can always sift through policies to find one that provides you with discounts to incentivize purchasing insurance from those insurance carriers.
You can use insurance agents like our team at Worth Insurance to find competitive quotes from top insurers, that way you can reduce the amount you pay each month while still getting adequate coverage.
How Insurance Premiums Are Calculated
Many factors go into how an insurance premium is calculated, and each company may weigh them differently.
Highly trained actuaries use their mathematical, statistical, and financial expertise to assess risks, create models, and quantify the risks. Ultimately, this results in a mathematical model that is used to determine insurance premiums.
Typically, the following factors go into how an insurance premium is determined.
- Where you live
- What career you have
- Your past claims history
- Your risk level
- How high your deductible is
- How much coverage you want
Examples Of Insurance Premiums
Insurance premiums will apply to all sorts of insurance, such as auto, life, property, and health insurance. You can usually pay either monthly or yearly depending on your policy agreement.
Let’s say you pay $400 a month for health insurance coverage. $400 is your monthly premium, and $400 x 12 = $4800 is your annual premium.
Insurance can be as cheap as tens of dollars each month, or it can cost even over a thousand dollars. Your premium depends on what kind of coverage you’re looking for, your deductible, and numerous other factors.
Common Types Of Insurance Premiums
Auto Insurance Premium
The auto insurance premium is how much you pay for your car insurance coverage. It will vary based on factors such as your age, driving history, claims history, as well as the model of the vehicle that you drive.
Homeowners Insurance Premium
If you own property, you may want to purchase property insurance such as a homeowners’ insurance policy. You can choose to pay for it monthly or yearly.
For homeowners’ insurance, you may be expected to make the premium payment annually if you have a lender who requires you to use an escrow account.
Renters Insurance Premium
If you’re renting a property, homeowners insurance won’t apply to you. Instead, you will need to purchase renters insurance, which will cover expenses for theft, bodily injuries, some natural disasters, and other perils depending on the amount of policy you purchase.
Compared to other insurance coverage types, your renter's insurance will likely have a much lower premium. It is based on your credit score, building security, and how much value your belongings have.
Life Insurance Premium
The life insurance premium greatly depends on what age you are when you purchase it.
Risk factors will also influence your life insurance premium, such as if you have any current health conditions. Typically, the earlier you start paying for life insurance, the more affordable the premium will be. It’s important to weigh your current situation to see whether it is the right time to buy life insurance.
How Do I Lower My Insurance Premium?
No one wants to break the bank to pay their insurance premium. If you want to lower your insurance premium, here are some things to consider when purchasing a policy:
The deductible is how much you need to pay before insurance kicks in and provides financial assistance. Depending on what type of coverage the deductible is for, you may also need to pay other fees out of pocket (the coinsurance).
Generally, if you are willing to pay more out of pocket for a claim and want to have a lower monthly premium, then it may be a good idea to find a policy that has a high deductible. Higher deductible plans allow you to have lower premiums.
On the other hand, if you would prefer to have a low deductible so you don’t need to pay as much out of pocket for a covered incident, then you may have to stick with a relatively higher insurance premium.
Your Coverage Needs
Sometimes, a policy will contain coverage for perils (covered incidents) that you actually do not expect to need coverage for. In this case, you might want to lower your coverage or even switch policies to a more affordable one that better suits your needs.
The coverage limit is something to consider changing when it comes to how much coverage you need. If you don’t believe you will reach the coverage limit in a year, you can find a policy option that has lower coverage limits and is therefore cheaper.
You might be eligible for discounts, but oftentimes you won’t know it unless you ask your insurance company. Discounts are available at many insurance companies, and there are often loyalty discounts for those who hold several policies with a single company or maintain coverage for many years.
Here are some common discounts that you can ask about and see if you are eligible for them.
- Safe driver insurance
- Low mileage and usage savings
- Veteran discount
- Multi-policy and bundling discounts
- Student discount
- Affiliation discount
- Loyalty discount
- Age of home discount
By applying all the discounts you are eligible for, you could save a significant amount on your monthly insurance premium. This is especially the case if you need to buy multiple insurance policies for different kinds of coverage.
Why do insurance companies have different premiums?
When shopping for insurance, the biggest questions many people have are: Why do I need to search for the most competitive price? Why does each insurance company seem to have different pricing and policies? Why am I getting drastically different quotes for what seems like the same coverage?
It’s complicated. First, insurance companies are businesses. They need to generate revenue somehow – but there is also a large amount of risk involved in providing insurance coverage because of the uncertainties.
One insurance company can cover as few as one customer (either it’s doing very poorly, or it’s somebody’s personal insurance company!) or as many as millions. Each individual or family who purchases a policy needs to have their risk levels assessed.
When a claim is accepted, it can easily go into the thousands and millions of dollars that the insurance company will end up paying. Insurance premiums can be expensive, but not that expensive. The insurance company pools all the policyholders together when assessing risk and determining what each insurance product should cost.
Like competing businesses, insurers will use different formulas, factors, and strategies to set up their premiums. These serve to minimize costs and keep each company afloat, especially if the market is currently in a difficult time.
That’s why when you’re shopping for insurance, the premiums and quotes you receive can differ so much.
What factors determine your insurance premium?
1. Your desired coverage type
The more coverage you need or want, the higher your insurance premium will likely be. For certain insurance policies, you have comprehensive coverage options. This type of insurance usually still has excluded perils that they don’t cover, but it may offer considerably more coverage than a standard insurance policy.
2. Coverage limit
Coverage limits, which is the maximum dollar amount of money an insurance claim will award you, will affect your premium. If you choose a policy with a higher limit, your premium may increase as well.
3. Your age
For many coverage types, your age will influence your premium. Auto insurance and life insurance are especially sensitive to differences in age.
4. Your location
Depending on what state you live in, your coverage may vary greatly.
For example, someone living in Florida may find their premium for flood damages significantly higher than someone who lives in low flood risk zones.
The neighborhood you reside in may also affect your insurance premium. If you live in a dense, urban area with high crime rates (such as car theft), your premium may go up.
5. Your claims history
Insurance companies will assess your history of claims. If you have shown that you are a reliable policyholder who does not take unnecessary risks, you will likely have a lower premium. That is because the insurance company will expect fewer or lower severity claims from you.
For example, if you have a track record of making frequent car insurance claims, your auto insurer may find you a risky driver and thus raise your premium.
What are the two premium categories?
When you pay an insurance premium, it generally falls under one or both of the following main categories:
- Underwriting fund – Underwriting provides policyholders with coverage. If the premium you pay goes towards underwriting, it means that it will be used to cover customers who make successful insurance claims.
- Investment fund – Many insurance companies will invest a certain portion of the premiums that their policyholders pay so that the company will make profits or be able to continue operating.
Insurance Premium FAQs
1. How do I get the lowest insurance premium?
Companies will typically offer lower grade coverage for those who want to lower their premiums, but there are other ways you can lower your premium.
The quickest and easiest way to do so is to simply ask the company if you can do anything to reduce the premium. This way, the insurer's representative will let you know if you are eligible for any discounts or can take any steps to directly lower your premium. If your insurance company raises its premiums in a new year, it’s a good idea to ask about lowering your rate before you choose to shop for a new insurance policy.
2. What happens if you don’t pay your premium?
If you don’t pay your insurance premium, it is very possible that your insurance company will end your coverage.
But don’t panic. Many insurers will give their policyholders a grace period so that they can catch up on the payments before their coverage gets canceled. Your policy details will usually tell you what will happen if you fail to make a payment.
3. Do I have to pay my premium if I don’t file any claims?
Insurance is there to protect you in case of a covered incident that may be unexpected or costly. However, even if you don’t end up using your insurance at all in a year, or you only pay out of pocket and don’t meet your deductible, you will not get your premium back. You still need to continue paying if you want to have coverage active.
Good news is that if you continue to not file any claims, your insurer may be willing to look at your (lack of) claims history and lower your insurance premium. This of course will depend on your coverage type and the willingness of the insurance company to adjust their rates.
How do I find competitive insurance premiums?
If you’re looking for personal or commercial insurance, Worth Insurance can help. We’re able to provide you with competitive quotes from top insurance companies to make insurance shopping that much easier.
Some shoppers find that the coverage they need isn’t readily available or affordable on the market. Our team can also help you secure personalized coverage that provides you with custom solutions.