What are insurance premiums? (2024)

Key points

  • An insurance premium is an amount you pay to an insurance company in exchange for providing financial protection through insurance.
  • Insurance companies can be paid monthly, biannually or annually and rates may be discounted for in-full payments.
  • There are insurance premiums for all different types of insurance policies, including auto, home, health and life insurance.
  • Many factors affect insurance rates, but premiums are primarily based on the amount of risk you pose to the insurance company.

Whether it’s for life insurance, car insurance, health insurance or another type of insurance, you likely pay a recurring amount to keep your coverage active. That regular expense is your insurance premium, or the cost of maintaining your insurance policy.

Insurance premiums allow us to make smaller, regular payments to ensure we are protected from greater financial loss in case something happens to our cars, homes, pets or even ourselves.

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What are insurance premiums?

An insurance premium is the amount of money you or an organization pays to maintain an insurance policy. Much like your mortgage or car loan payment ensures you have a place to live or a vehicle to drive, your insurance premium ensures you have coverage when you need it.

In return for your premium, your insurance provider guarantees to reimburse you for a loss covered by your policy. For instance, if you make regular payments for a standard homeowners insurance policy and you have an accidental fire in your kitchen, your insurer will reimburse you for the cost to repair or replace damaged items and structures covered, up to the limits in your policy.

For insurance companies, a portion of the premium acts as revenue, but it also covers the cost of coverage, including paying out claims.

How do insurance premiums work?

When you start the process of buying an insurance policy, the insurance company evaluates the risk you present. This risk analysis helps the insurance company set your premium.

“Each type of insurance — for example, life, auto, home, health, disability, or long-term care — all have different factors used to create your risk profile,” says Jeff Sachs, a financial advisor and founder of Sachs Financial, a retirement-focused firm. “This profile is the insurance company’s determination of how likely you are to file a claim.”

For instance, a car insurance provider will look at various factors like your driving record, credit history and age to determine how much you should pay for coverage. If you have a clean driving record, you’ll likely pay less for coverage than someone who has an accident or traffic violation on their record. Similarly, teen drivers and drivers with poor credit typically pay more for coverage.

Depending on the type of policy you need and the insurer you choose, you may have the option to choose a payment schedule. Payment schedules often include monthly, biannually or annually, though these vary.

Your insurance policy will remain active and your insurer will reimburse you for covered losses as long as you continue to pay your premium. If you stop paying your premium, you put your policy at risk.

If you’re in a car accident, for example, and you’re not up-to-date on your payments, the insurance company could deny the claim. Essentially, you didn’t follow through on your end of the deal, so they may not follow through on theirs.

Types of insurance premiums

Premiums vary by insurance type. Here are a few of the common types of premiums you may encounter.

Car insurance premium

There are several types of car insurance available to drivers. The type and amount of coverage you need play a major role in determining your car insurance premium.

Drivers in most states are required to carry liability coverage, which pays for the injuries and property damage sustained by other drivers, their passengers and even pedestrians if you’re at fault for an accident. It can also cover your legal fees and settlements if a victim sues you.

Depending on your situation, you may also need or choose to purchase other types of coverage, such as collision and comprehensive insurance, uninsured motorist insurance and personal injury protection (PIP) coverage. You can further enhance your policy with add-ons, such as roadside assistance plans.

Each additional type of coverage will increase your premium.

Other factors that will affect your car insurance premium include:

  • Age.
  • Gender (in most states).
  • Driving record.
  • Credit history.
  • Make, model and year of vehicle.
  • Available discounts.
  • Location.
  • Deductible, when applicable.

Car insurance companies allow drivers to pay their premiums monthly, but many offer a discount if you pay annually or biannually.

Home insurance premium

Home insurance is designed to protect you from financial loss related to damage to your house, or dwelling, as well as damage to or theft of covered personal possessions.

In exchange for your premium, your insurer will reimburse you if you have to repair, replace or rebuild after a covered loss, in accordance with your policy agreement. A standard homeowners insurance policy also includes liability coverage, which can protect you financially if you or a family member is at fault for an injury and the injured person sues.

Homeowners insurance premiums can be paid directly to your insurance company in accordance with your agreed-upon payment schedule. But many homeowners choose to lump their home insurance premiums in with their mortgage payment.

If you choose this option, your lender will set aside a portion of your mortgage payment and use it to pay your insurer. You can also choose to have your lender use escrow funds to pay your real estate taxes.

Like auto insurance, there are several factors that an insurer uses to determine your homeowners insurance premium, including:

  • Type and amount of coverage.
  • Location.
  • Cost to rebuild your home.
  • Value of home contents.
  • Deductible.
  • Previous claims history.

Renters insurance premium

Renters insurance covers your personal property inside your rental, whether it’s a house, apartment or condo, in exchange for a premium.

As long as you pay your premium on time, your renters insurance will reimburse you for items that are stolen or damaged by a covered issue, such as fire.

A renters insurance policy also typically includes liability insurance, which covers you if someone is injured in your apartment, your dog bites someone at the park or your child floods the bathtub and the water damages your downstairs neighbor’s belongings.

Renters insurance premiums are usually paid on a regular schedule, such as monthly or annually. Many insurance companies offer a discount if you pay for your policy up front or enroll in autopay.

Factors that can determine your renters insurance premium include:

  • Location.
  • Type and amount of coverage.
  • Claims history.
  • Credit history.
  • Deductible.

Health insurance premium

Your health insurance premium is how much you pay for your selected medical insurance plan. While home and auto insurance premiums are fairly straightforward, health insurance premiums can be complex.

In the U.S., many people receive health insurance through their employers. In this case, the employer often pays a portion of the premium, while the employee pays the rest. The amount you pay is usually deducted from your paycheck before taxes.

If you purchase health insurance on your own, you’ll likely make regular monthly payments to the insurer.

Health insurance premiums can vary significantly, as can the coverage they provide. In general, your premium will be influenced by:

  • Insurer and plan you choose.
  • Deductible selected.
  • Number of dependents on your policy.
  • Location.
  • Age.
  • General health.
  • Occupation.
  • Nicotine use status.
  • Family history.

Life insurance premium

A life insurance policy is one you take out to financially protect your loved ones in case you die. There are two primary types of life insurance you can purchase:

  • Term life insurance offers locks in your coverage and premium for a specific period of time, such as 10 or 30 years.
  • Permanent life insurance lasts your entire life and typically includes a cash value or savings component. There are several types of permanent life insurance, including whole life, universal life and variable life.

Term life insurance premiums are generally cheaper than permanent life insurance premiums. That’s because term life insurance is only for a limited period of time and does not include a cash value component.

In addition to the type of policy you choose — term or permanent — the following factors will also be used by an insurer to determine your premium:

  • Age.
  • Gender.
  • Height and weight.
  • Medical history.
  • Medical history of your parents and siblings.
  • Amount of coverage.
  • Nicotine or marijuana use.
  • High risk professionals or hobbies.
  • Driving record, especially DUIs or high-risk traffic violations.
  • Credit history.

Insurance premium vs. deductible

Your insurance premium is an out-of-pocket expense you pay in exchange for coverage.

The definition of a deductible depends on the type of coverage, and not all types of insurance carry a deductible. The most common types of coverage that include deductibles are homeowners insurance, car insurance and health insurance. Life insurance policies do not carry deductibles.

Homeowners insurance deductible

When you buy homeowners insurance, you must choose a deductible amount. A homeowners deductible can be a flat rate, such as $500 or $1,000.

Some insurers also offer a percentage-based deductible, such as 2%. If you choose a percentage-based deductible, your insurer will issue you a deductible based on your total amount of coverage and the deductible percentage you chose.

You will not have a deductible on a homeowners insurance liability claim.

Auto insurance deductible

Like a homeowners insurance deductible, an auto insurance deductible is the amount your insurer will deduct from your claim check. Not all car insurance claims are subject to a deductible, however.

Collision and comprehensive insurance claims are the most common type of car insurance in which a deductible will come into play.

You may also have a deductible with a personal injury protection or uninsured/underinsured motorist property damage claim.

You will not have a deductible with a liability car insurance claim.

Car insurance deductibles are flat rates, usually between $500 and $1,000, though they could be higher. So if you file a collision insurance claim for $2,000 and your deductible is $500, your claim check will be for $1,500.

Health insurance deductible

Health insurance deductibles operate differently than home or car insurance deductibles. A health insurance deductible is the amount of money you must pay out of pocket for covered services before your insurer will start to pay its share.

Say for example you break your ankle and treatment costs $4,000. If you have a $1,000 deductible, you will need to pay $1,000 out of pocket before your insurer will start to pay.

Health insurance deductibles are generally set annually, meaning if you meet that $1,000 deductible for ankle surgery in May, you’ll only pay a copayment or coinsurance for covered services for the remaining coverage year. Your insurer will pay the rest.

Though deductibles vary by type of coverage, one thing is true: The deductible you choose will impact your insurance premiums. Higher deductibles will result in lower premiums because the insurer is carrying less of the financial burden after a claim. A lower deductible means your insurer will carry more of the financial risk and your premium will be higher.

What factors affect insurance premiums?

In general, insurance premiums are about risk. The more of a risk the insurance company sees in you — meaning the more likely it thinks you are to file a claim — the higher your insurance premiums will be.

Insurance premium factors differ based on the type of insurance you buy. For example, when it comes to life insurance, your health is a major factor. Older individuals and those in poor health are more likely to pay higher premiums because they’re more likely to die during the policy term.

“If you are healthy but like to ride motorcycles and scuba dive, you have more risk in your life and it’s more likely the insurance company will have to pay out a claim,” Sachs says.

In the case of car insurance, your insurer considers how likely you are to get into an accident. To determine that, it will look at your driving history, your age and other factors.

Your state’s laws may also impact your premiums. For example, several states have laws limiting what car insurance companies can consider when setting insurance rates. Some states prohibit car insurance companies from considering your credit score, for example, while others prohibit companies from considering your gender.

Your insurance premium is also based on the amount the insurance company would have to pay if you filed a claim. Not surprisingly, expensive cars and homes cost more to insure because they would be more costly to replace. Likewise, someone with $1 million in life insurance coverage will pay more than someone with $100,000 because the potential cost to the insurance company is far greater.

Frequently asked questions (FAQs)

There are many ways to lower your insurance premiums, including reducing your coverage amounts, increasing your deductible and shopping around.

“Knowing how to get the lowest premiums is tricky, because insurance companies don’t disclose how they calculate the internal cost to insure you,” Sachs says. “But if you reduce your risk factors, it will help.”

For instance, improving your credit score may help you lower your car insurance premium. Adding safety features to your home may help lower your homeowners insurance premium. And abstaining from nicotine use and maintaining a healthy weight can help you lock in lower life insurance premiums.

Insurance premiums are generally paid by the customer, whether you’re paying a premium for a personal insurance policy or an organization is paying for a business policy.

For example, if you buy car insurance, you will be responsible for paying the premium. However, if you get health insurance or supplemental life insurance through your employer, your company may pick up all or a portion of the premium.

How often you pay your insurance premiums depends on the type of insurance and the policy agreement you have. Other options may include biannual or quarterly payments, depending on the insurer and coverage type.

There are insurance premiums for each different type of insurance, including auto insurance, health insurance and life insurance.

An insurance premium is the amount of money that an individual or organization pays to maintain an insurance policy. It is a recurring expense that ensures coverage in case of a loss or damage covered by the policy .

Insurance premiums can be paid monthly, biannually, or annually, depending on the policy and the agreement with the insurance company. Some insurance companies offer discounts for making full payments upfront.

There are insurance premiums for various types of insurance policies, including auto insurance, home insurance, health insurance, and life insurance.

The amount of insurance premiums is primarily based on the level of risk that the insured individual or organization poses to the insurance company. Factors such as driving record, credit history, age, location, and the type and value of the insured property can affect insurance rates.

Insurance premiums allow individuals and organizations to make smaller, regular payments to ensure protection from significant financial loss in case of an unfortunate event, such as damage to property or personal injury.

It's important to note that the information provided above is based on general knowledge about insurance premiums. For specific details about insurance policies and premiums, it is recommended to consult with an insurance professional or refer to the terms and conditions of the insurance policy.

Key Points:

  • An insurance premium is the amount paid to maintain an insurance policy.
  • Premiums can be paid monthly, biannually, or annually.
  • Insurance premiums vary based on factors such as risk, driving record, credit history, age, and location.
  • Insurance premiums allow for regular payments to ensure protection from financial loss.
  • Consult an insurance professional or refer to the policy terms for specific details.
What are insurance premiums? (2024)
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