What Are Insurance Premiums?

Insurance premiums are the fees that you pay in order to have insurance. The amount you pay will depend on a number of factors, including the type of coverage you choose, your age, and where you live. Premiums are usually paid monthly, but may also be paid annually or semi-annually.

Insurance Premiums

Insurance premiums are the fees insurance companies charge customers for the insurance policies they buy. The cost of your insurance is your premium.

Here are some basics to help you understand what an insurance premium is and how it works.

Definition and Examples of an Insurance Premium

Insurance is an important part of life, but it can be expensive. When you first start buying insurance, you may hear the term "premium." A premium is the amount of money you pay for a policy that offers coverage for things like your car, home, health, or life.

For example, if you pay $212 per month to keep your car insured, your yearly insurance premium would be $2,544. If you have a six-month policy, your insurance premium would be $1,272.

How Insurance Premiums Work

If you're looking for a lower rate on your car insurance, you'll likely need to start with a base calculation. Location and personal details like age and driving record can lead to discounts that lower the cost of your premium.

Insurance premiums are based on a number of factors. You can learn about these factors in greater detail in the section about the four factors that determine the premium. To get preferred rates, or more competitive or cheaper premiums, you will need to provide additional information.

The insurance premium can be paid annually, semi-annually, or monthly. If the insurance company asks for it, the premium may also be paid upfront. This is often the case when someone has had their policy canceled in the past for not paying.

The premium is the key part of your insurance payment. Whether or not a premium is considered taxable income to you can vary depending on the type of insurance policy (e.g., group-term life insurance that exceeds $50,000 and is carried directly or indirectly by an employer).

Some service fees may be charged, depending on your location and the company you have your insurance contract with. You can find out more about what's involved by speaking to the National Association of Insurance Commissioners' Guidelines or your State Insurance Commissioners' office - both of which should be able to provide you with more specific information about any applicable fees or charges on your premium.

Note: Please be aware that any extra charges, such as issuance fees or other service charges, are not considered to be premiums and will be itemized separately on your premium or account statement.

Your insurance premiums will change depending on the type of coverage you want and how risky you are perceived by the insurance company.

Shopping for insurance can be a daunting task. This is why it is always a good idea to work with an insurance professional who can compare premiums with several insurance companies on your behalf.

When people shop around for insurance, they may find different premiums charged for the cost of their insurance with different insurance companies. Switching to a company that is more interested in "writing the risk" could save them money on their premiums.

What Factors Determine an Insurance Premium?

When purchasing car insurance, most people focus on the price of the premium. However, there are a number of other factors that contribute to the final cost of your policy. In this blog post, we'll discuss some of those factors and explore how they can impact your rates.

1. Type of Coverage

When you purchase an insurance policy, insurance companies offer different options. 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 choose an open perils or all-risk coverage policy, it will be more expensive than a named perils policy that only covers the basics.

2. Amount of Coverage and Your Insurance Premium Cost

Insurance premiums are always higher for those who want more coverage. Whether you’re buying life insurance, car insurance, health insurance, or any other type of insurance, you’ll always pay more for a greater amount of protection.

There are two ways you can save money on your insurance premiums. The first way is easy, but the second way is a little more complicated:

The amount of coverage you select can vary based on the dollar value of the items you want insured. For example, if you want to insure a house for $250,000, your premium will be different than if you want to insure a house for $500,000. It’s simple: the more money you want to insure, the more you’ll have to pay for insurance.
You can pay less for home insurance if you have a higher deductible. For example, you can save up to 25% by increasing your deductible from $500 to $1,000.4 With health insurance or supplemental health policies, you can take higher deductibles or look at policies with different options like higher co-pays or longer waiting periods.

3. Personal Information of the Insurance Policy Applicant

Insurance premiums vary depending on a number of factors, including your insurance history, where you live, and other aspects of your life. Every insurance company has its own rating criteria.

Some companies use insurance scores to determine premiums. This score is based on many personal factors, such as credit rating, car accident frequency, and personal claims history. Your occupation can also be a factor in your insurance score.

Risk factors such as age and health conditions are considered when determining life insurance policy premiums.

All businesses have target clients, and insurance companies are no exception. To be competitive, insurance companies need to determine what the profile of their target clients is. They then create programs or discounts to help attract these ideal customers.

There are a variety of strategies that insurance companies use to attract clients. For example, one company may focus on attracting seniors or retirees, while another will price premiums lower in order to attract young families or millennials.

4. Competition in the Insurance Industry and Target Area

If an insurance company wants to increase market share in a particular segment, it may lower premiums to attract new customers. This is a common strategy in the insurance industry, as premiums can be easily adjusted to reflect market conditions. A company that is doing well may keep rates high, while a company that is struggling may lower rates to bring in new business.

Who Decides the Insurance Premium?

Each insurance company has people who work in risk assessment, evaluating potential risks and determining premiums for customers.

Actuaries work for insurance companies to figure out things like:

The likelihood of a risk and perils
Disasters and claims lead to certain costs, which actuaries use to create projections and guidelines.

Calculations by actuaries help determine how much it will cost to pay claims and how much money insurance companies should collect in order to make a profit.

The actuaries’ information helps shape underwriting. Underwriters use guidelines to determine the risk and, as part of that process, to set the premium.

Insurance companies determine how much money they will charge for their insurance contracts.

What Does the Insurance Company Do With Insurance Premiums?

The insurance company has to collect the premiums from many people and make sure it saves enough of that money in liquid assets so it can pay the claims of the few.

Note: Insurance companies earn a premium on life policies by charging more for coverage than they expect to pay out in claims. The portion of the total premium that an insurance company can show on its income statement as revenue, based on the policy's duration and how much of the term has passed, is called “earned premium.”

Why Do Insurance Premiums Change?

An insurance company’s ability to stay profitable may not always require an increase in premiums. In fact, if the company experiences fewer claims and losses than anticipated, it may not have to raise rates at all. However, if the company suffers greater losses than expected, it may need to revise its premium structure and reassess the risk factors involved in each policy. In these cases, premiums might go up.

Examples of Insurance Premium Adjustments and Rate Increases

It's hard to know whether you're getting a good deal on your insurance or not, since rates can vary based on personal factors, company discounts, or your location.

You might think you're getting a great deal, but then find out that someone else is paying much less for the same coverage. This is because insurance rates are also impacted by competition and the company's loss experience.

There is no one-size-fits-all answer to this question. Every situation is unique and the actuaries at an insurance company will adjust their premiums accordingly.

If there is a low risk factor in an area one year, the company may charge very minimal premiums. However, if crime rates, natural disasters, or other losses spike in that area, the company may raise its premiums in the following year.

That area may see rate increases as a result of the insurance company's need to stay in business. People in that area may shop around for better rates.

Pricing premiums higher than before in a certain area is likely to lead people to change their insurance company. If those clients aren’t willing or able to pay the insurance company’s desired price, it could mean a decrease in the company’s profitability ratios.

The insurance company is able to keep their rates reasonable by assessing appropriate premiums for the risks and making fewer claims. This way, both the company and their target clients benefit.

How to Get the Lowest Insurance Premium

There is no one-size-fits-all answer to getting the lowest insurance premium. Instead, it’s important to find an insurance company that is most interested in insuring you. Rates will vary depending on a variety of factors, so it’s important to compare as many quotes as possible.

If you're experiencing higher-than-usual rates from your insurance company, it's worth asking your representative if there's anything that can be done to lower your premium.

If the insurance company is unwilling to change the premium it is charging you, then shopping around may find you a better price. You can also get a good understanding of the average cost for your particular risk by doing some research.

If you're curious why your insurance rates went up, or you're looking for ways to bring your premiums down, talking to your insurance representative or an insurance professional can help. They'll be able to explain why your premiums increased, and might be able to suggest ways for you to get discounts or lower your costs.