An insurance premium is the amount of money the insurance company charges you for your insurance policy.
How an Insurance Premium
WorksInsurance costs money, but one term that may be new when you first start buying insurance is “premium.” Typically, the premium is the amount paid by a person (or a business) for policies that provide auto, home, health care, or life insurance coverage.
For example, if you pay $212 per month to keep your car insured, your yearly insurance premium would be $2,544. If you purchased a six-month policy, your insurance premium would be $1,272.
Insurance premiums usually have a base calculation. Then, based on your personal information and location, you may have discounts that are added to the base premium that reduces your cost. In order to get preferred rates, or more competitive or cheaper insurance premiums, additional information is used.
The insurance premium may be paid on an annual, semi-annual, or monthly basis. If the insurance company decides that it wants the insurance premium paid upfront, it may also require that.
The cost of your insurance premium will vary depending on the type of coverage you are looking for, as well as the risk.
This is why it is always a good idea to shop around for insurance or work with an insurance professional who can shop premiums with several insurance companies for you.
What Factors Determine an Insurance Premium?
An insurance premium is usually determined by four key factors.
Type of Coverage
Insurance companies offer different options when you purchase an insurance policy. The more coverage you get, or the more comprehensive coverage you choose, the higher your insurance premium may be.
For example, when looking at premiums for home insurance, if you purchase an open perils or all-risk coverage home insurance policy, it will be more expensive than a named perils home insurance policy that only covers the basics.
Amount of Coverage and Your Insurance
Premium CostWhether you are purchasing life insurance, car insurance, health insurance, or any other insurance, you will always pay a higher premium (more money) for higher amounts of coverage.
This can work in two ways. The first way is pretty straightforward, and the second way is a little more complicated but a good way to save on your insurance premiums:First, your amount of coverage can be altered by the dollar value you want on whatever you are insuring.
For example, insuring a house for $250,000 will be different from insuring a house at $500,000. It’s pretty straightforward: the more dollar value you want to insure, the more expensive the premium will be.
Personal Information of the Insurance
Policy ApplicantYour insurance history, where you live, and other factors of your life are used as part of the calculation to determine the insurance premium that will be charged.
Every insurance company will use different rating criteria.Some companies use insurance scores, which can be determined by many personal factors, from credit rating to car accident frequency or personal claims history, and even occupation.
These factors often translate into discounts on an insurance policy premium.For life insurance, other risk factors specific to the person being insured will be used as well, such as age and health conditions.
Competition in the Insurance Industry and Target
AreaIf an insurance company decides that it wants to aggressively pursue a market segment, it may deviate rates to attract new business. This is an interesting facet of insurance premiums because it may drastically alter rates on a temporary basis, or on a more permanent basis if the insurance company is having success and getting good results in the market.
What Does the Insurance Company Do With Insurance Premiums?
The insurance company has to collect the premiums and make sure it saves enough of that money in liquid assets to be able to pay the claims for its policyholders.The insurance company will take your premium and put it aside, letting it grow for every year you don’t have a claim. If it collects more money than what it pays in claim costs, operational costs, and other expenses, the company will be profitable.