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What Is an Insurance Premium?

How It Works

Auto Insurance

Life insurance, how premiums are calculated, special considerations.

Insurance Premium Defined, How It's Calculated, and Types

Julia Kagan is a financial/consumer journalist and former senior editor, personal finance, of Investopedia.

Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in 2018. Thomas' experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning.

Katrina Ávila Munichiello is an experienced editor, writer, fact-checker, and proofreader with more than fourteen years of experience working with print and online publications.

Investopedia / Paige McLaughlin

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.

Key Takeaways

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:

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.

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 Premiums?

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.

Policy Types

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What Is an Insurance Premium?

A premium is the price you pay to buy an insurance policy. Premiums are your regular payments for many common insurance policies, including life, auto, business, homeowners and renters. If you fail to pay your premiums, you risk having your policy canceled. Most people pay their premiums monthly, but you may save money by paying for the whole year up front or choosing a semi-annual premium.

How premiums are calculated varies, starting with the type and amount of coverage you select. When you were shopping for coverage, did you specify the same exact coverage with both insurers for an apples-to-apples comparison? If you chose a lower deductible or higher limits with one insurer, that could explain the difference in your premium quotes.

Auto insurance premiums also typically take into account your driving record, how much you drive, how much coverage you select and where you live, among other factors. Life insurance premiums typically factor in your age, health and life expectancy, along with the coverage limits you choose.

The deductible you pick also typically affects your premium, depending on the type of policy. Your deductible is the amount you must pay toward the costs of an insured loss — say a car crash or home fire — before your insurance company makes a payment. With most home or auto insurance policies, choosing a higher deductible can lower your premium costs.

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The information contained in this page is provided for general informational purposes only. The information is provided by Farmers ® and while we endeavor to keep the information up to date and correct, we make no representations or warranties of any kind, express or implied, about the completeness, accuracy, reliability, suitability or availability with respect to this article or the information, products, services or related graphics, if any, contained in this article for any purpose. The information is not meant as professional or expert advice, and any reliance you place on such information is therefore strictly at your own risk.

What Impacts the Price of My Auto Insurance?

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Does My Credit Score Affect My Auto Insurance Premiums?

How Can I Save Money on My Home Insurance?

Advertisement produced on behalf of the following specific insurers and seeking to obtain business for insurance underwritten by Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange, Mid-Century Insurance Company, Civic Property and Casualty Company, Exact Property and Casualty Company, Neighborhood Spirit Property and Casualty Company, Farmers Insurance Company of Washington (Bellevue, WA) or affiliates. In TX: insurance is underwritten by Farmers Insurance Exchange, Fire Insurance Exchange, Truck Insurance Exchange, Mid-Century Insurance Company, Farmers Texas County Mutual Insurance Company, Mid-Century Insurance Company of Texas or Texas Farmers Insurance Company. In NY: insurance is underwritten by Farmers Insurance Exchange, Truck Insurance Exchange, Mid-Century Insurance Company or Farmers New Century Insurance Company. Home office, Los Angeles, CA.

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Life insurance issued by Farmers New World Life Insurance Company, a Washington domestic company: 3120 139 th Ave. SE, Ste. 300 Bellevue, WA 98005 (CA#: 0378-0). Farmers New World Life is not licensed and does not solicit or sell in the state of New York.

Securities offered through Farmers Financial Solutions, LLC, (In NY: Farmers Financial Solutions and Insurance Agency), 31051 Agoura Road, Westlake Village, CA 91361. Member FINRA & SIPC

Each insurer has sole financial responsibility for its own insurance. List of all insurers at farmers.com. Not all insurers are authorized in all states. Not all products, coverages, features and discounts are available in every state and may vary by state. Restrictions, exclusions, limits, and conditions apply. See agent for details.

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Insurance premium: What is it and how does it work?

Insurance premium: what is it and how does it work | insurance business america.

What are insurance premiums?

How does an insurance premium work, how are insurance premiums calculated, how can policyholders save on insurance premiums, insurance premium vs deductible: what’s the difference.

When purchasing an insurance policy, one of the most common terms that a person will encounter is insurance premium. This is something that a policyholder is required to pay to continue receiving coverage.

In this part of our client education series, Insurance Business explains what an insurance premium is, how it works, and how it is calculated for different types of coverage. We encourage insurance agents and brokers to share this article with their clients to give them a deeper understanding of this crucial element of an insurance policy.

An insurance premium is the amount the policyholder agrees to pay in exchange for coverage. It guarantees financial compensation for the damages or losses they incur, as long as timely payments are made. Depending on the type of policy, the insurance company may require premiums to be paid monthly, semi-annually, or yearly.

Policyholders need to meet regular premium payments to keep their plans active. Failure to do so may void their policies and affect their future eligibility for obtaining coverage.

Insurance companies, in turn, use the premiums they collect to ensure that they have enough liquid assets to be able to provide financial compensation to policyholders in an event of a claim. If the amount of money they secure exceeds what they pay in claims costs and operational expenses, the difference is considered profit, also referred to as earned premium.

Some insurers also use premiums as an investment tool to generate higher returns. This strategy allows them to offset some of the costs associated with providing coverage and keep their insurance prices competitive.

While investing premiums may be a profitable move for many insurance providers, they are still required to maintain a certain level of liquidity to ensure that they have enough assets to pay for claims. The number is set by state insurance regulators.

Insurance premiums may also include service charges, depending on state insurance laws and the insurance contract. Any additional charges, however, must be itemized separately on the premium or account statement.

There are several factors that influence the price of an insurance premium, but generally, it is based on the policyholder’s risk level. This means that the more risks they pose to the insurer, the higher their premiums will be.

Depending on the type of coverage, insurance companies use different parameters in calculating premiums.

Auto insurance

Different car insurance providers use different metrics in determining how much risk a motorist poses to them. These include driving-related factors such as traffic violations and type of vehicle, which carry a huge weight in calculating premiums, and personal attributes, including gender and marital status, which are considered not as essential.

Here are some of the most common factors auto insurers take into consideration when determining insurance rates, according to the Insurance Information Institute (Triple-I).

Home insurance

Home insurers consider a range of parameters when determining premiums, the biggest of which are the home’s location and the cost of a rebuild. Here’s how these and other factors impact the cost of home insurance premiums.

Other factors that may influence home insurance rates include:

Life insurance

All the variables that can affect a person’s life expectancy also have an impact on life insurance premiums. These include:

Historically, rates tend to be higher for men because they often have a shorter life expectancy than women. Certain professions – including truck drivers, construction workers, and law enforcement officers – also expose a person to a higher risk of fatal injuries , pushing up premiums. The same with involvement in extreme and adventure sports.

Prices may also vary depending on the insurer and the type of policy. Permanent life insurance policies , for instance, have higher premiums because these provide lifetime coverage compared to term life plans, which offer financial protection only within a set term.

Health insurance

Health insurance companies can only account for five factors when determining premiums under the healthcare law, according to the healthcare exchange website Healthcare.gov . These are:

The government website also noted that states can limit how much impact these factors have on insurance rates but prohibited them from using medical history and gender in calculating premiums. You can check out how health insurance plans work in the US and in different regions of the world in our health coverage guide .

There can be a massive difference between how much policyholders pay on premiums, depending on their personal circumstances and a range of insurance-related factors. But there are also several practical ways for them to save on premium costs. Here are some of them:

1. Comparing insurance rates

Because each person’s profile and circumstances are different, there is no single policy that is the cheapest for everyone. An insurance provider that offers the cheapest policy for one person might be the most expensive option for another. The only way for someone to ensure they are getting the lowest premiums possible is to compare insurance rates. This can be done through various insurance comparison websites that are easily accessible online.

2. Taking advantage of discounts

Insurance providers offer a range of discounts, which policyholders can take advantage of to reduce their annual premiums. These include:

3. Skipping the unnecessary coverage

Insurance companies offer a range of coverage options that impact how much premiums will cost. Industry experts suggest ditching the coverage that policyholders might not need to reduce rates. For those who are already covered by health insurance, for example, they can remove or reduce medical payments coverage from their auto insurance plans to cut costs.

4. Maintaining a good credit rating

In most states, insurers use a person’s credit score in calculating car and home insurance premiums. This is done because there is a correlation between a person’s credit rating and the chances of filing claims. Therefore, keeping one’s finances in check can help policyholders save on insurance costs.

5. Raising your deductible

A higher deductible means policyholders will pay lower premiums. But this also increases the amount they need to pay before their insurer picks up the tab in the event of an accident or loss. This is why it is important for policyholders to be mindful of the costs when taking this route to make sure they have enough saved up in case of an emergency.

6. Shopping around when it’s time to renew

Unless they are purchasing a term life insurance plan, which locks in a monthly rate for the full policy term, the premium amount usually is not set in stone. Most policies last for six months or a year, at which point the insurer will re-evaluate their risk level which may impact insurance rates. Because of this, experts advise policyholders to review their coverage every time it renews and shop around. A good way to find the best rates is to get at least three different quotes and go for the one that offers the best value for their money.

Premiums and deductibles are two of the major out-of-pocket costs associated with insurance, which is why they may sometimes be confused with one another.

While an insurance premium is the amount a policyholder pays in exchange for coverage, a deductible is the amount the insured needs to pay for damages before coverage kicks in.

To illustrate, suppose a homeowner has a $500 deductible for the dwelling coverage on their home insurance. If a storm causes $5,000 worth of covered damages to their house, they will need to pay the $500 deductible for repairs while the insurance company covers the remaining $4,500.

One important thing to note is that the higher the deductible, the lower the insurance premium, and vice versa. Because of this, choosing a higher deductible may be a good way to reduce insurance costs, as long as the policyholder can afford to pay the out-of-pocket expenses.

A single policy may also have multiple deductibles as each coverage may have its own deductible amount. The only exception is health insurance, where plan holders usually need to meet a single deductible for an entire calendar year.

Almost all insurance policies come with a deductible, except for life insurance, where the beneficiaries receive a tax-free lump-sum payment after the policyholder dies.

You can find more definitions of common insurance industry terms in our jargon guide.

Are there other aspects of insurance premiums you want to discuss? Do you have additional tips on how policyholders can save on insurance costs? Chat us up on the comments section below.

What is a car insurance premium?

Your car insurance premium is the specific amount of money you pay a company to provide insurance protection for yourself and your vehicle. Premiums are usually paid either monthly, every six months, or annually and are determined by various factors, including your driving record, age, and the coverages you select as part of your policy.

How do car insurance companies calculate premiums?

Insurance companies figure out how to calculate insurance premiums using their own unique formulas. Your total auto policy premium is highly personalized.

Key factors of a car insurance premium include:

Learn more about what impacts your car insurance rate .

What is an insurance quote vs. a car insurance premium?

An insurance quote is an estimate of how much your policy will cost, provided by the insurance company before you buy. Your insurance premium is the amount you agree to pay for the coverage detailed in your policy, which is usually the same amount as the quote you received. If you're wondering how to determine what your annual premium will be, it's best to get a quote.

When providing personal information for an insurance quote, be honest about your driving history. The chances are that the company you choose will find out about any fender benders before issuing a policy. If you don't disclose prior accidents you were involved in, your car insurance premium could be significantly higher than the quoted amount.

What is a car insurance premium vs. a deductible?

As noted above, your car insurance premium is the amount you agree to pay for your policy. Your car insurance deductible is the amount you agree to pay out of pocket for certain types of claims, usually for claims filed under your comprehensive or collision coverage.

Is car insurance paid monthly or annually?

Most insurance companies let you choose between paying your car insurance premium monthly, every six months, or annually. You could receive an auto insurance discount if you choose to pay the full amount for a six-month or annual policy upfront.

When do car insurance premiums go up — and why?

Policies from most insurance companies get packaged in six- and 12-month policy periods. Assuming your coverages, driving record, and other basic criteria remain the same for that entire term, your premium typically won't change. After that term period ends, your insurance company may revise your premium, which could result in your car insurance rate going up or down.

Remember, insurers use their own unique formulas to determine their rates — and they continue to evaluate their policyholders over time. A clean driving record or switching to a safer car can help lower the cost of your car insurance premium. In contrast, filing multiple accident claims over a short period of time or getting a speeding ticket could lead to a higher premium.

Looking for more information about auto insurance? Our car insurance resource center has you covered.

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Please note: The above is meant as general information to help you understand the different aspects of insurance. Read our editorial standards for Answers content . This information is not an insurance policy, does not refer to any specific insurance policy, and does not modify any provisions, limitations, or exclusions expressly stated in any insurance policy. Descriptions of all coverages and other features are necessarily brief; in order to fully understand the coverages and other features of a specific insurance policy, we encourage you to read the applicable policy and/or speak to an insurance representative. Coverages and other features vary between insurers, vary by state, and are not available in all states. Whether an accident or other loss is covered is subject to the terms and conditions of the actual insurance policy or policies involved in the claim. References to average or typical premiums, amounts of losses, deductibles, costs of coverages/repair, etc., are illustrative and may not apply to your situation. We are not responsible for the content of any third-party sites linked from this page.

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What Is an Insurance Premium?

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An insurance premium is the amount you pay for an insurance policy. Simply put, premiums are what you pay insurance companies in exchange for coverage. Therefore, when you hear “insurance premium," think “insurance price.”

You typically pay premiums monthly, semiannually or annually, depending on the policy. Insurers sometimes offer a small discount for bundling your policies or paying your premium annually.

The price of your premium depends on the type of insurance you buy, such as life, renters, auto or homeowners. You may also be responsible for an insurance deductible , which is the amount you pay before the insurer starts covering the costs of a claim.

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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 insurance, which includes liability, comprehensive and collision insurance. A full coverage car insurance policy costs $1,630 a year on average for good drivers with good credit, according to NerdWallet’s auto insurance rates analysis. In contrast, a driver with the same background would pay $561 on average for minimum car insurance.

To find the best price, compare car insurance rates when shopping for a policy.

» MORE: The best car insurance companies

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. The average cost of life insurance is $27 a month, based on a 20-year, $500,000 term life policy for a 40-year-old, according to data provided by Quotacy.

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.

» MORE: Get life insurance quotes

Renters insurance premiums

On average, renters insurance premiums are $14 a month, according to NerdWallet’s renters rates analysis. 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 your credit score, in most states. Shop around for renters insurance quotes before buying a policy.

» MORE: The best renters insurance companies

Homeowners insurance premiums

The average homeowners insurance premium is $1,765 a year, a NerdWallet rates study found. Homeowners insurance premiums are based on a variety of factors, such as the building’s location and value, your credit score in most states, your claims history and the amount of coverage you want to buy.

» MORE: Find the best homeowners insurance

Auto insurance rates

NerdWallet averaged rates based on public filings obtained by pricing analytics company Quadrant Information Services. We examined rates for men and women for all ZIP codes in any of the 50 states and Washington, D.C. Although it’s one of the largest insurers in the country, Liberty Mutual is not included in our rates analysis due to a lack of publicly available information.

In our analysis, “good drivers” had no moving violations on record; a “good driving” discount was included for this profile. Our “good” and “poor” credit rates are based on credit score approximations and do not account for proprietary scoring criteria used by insurance providers.

These are average rates, and your rate will vary based on your personal details, state and insurance provider.

Sample drivers had the following coverage limits:

$100,000 bodily injury liability coverage per person.

$300,000 bodily injury liability coverage per crash.

$50,000 property damage liability coverage per crash.

$100,000 uninsured motorist bodily injury coverage per person.

$300,000 uninsured motorist bodily injury coverage per crash.

Collision coverage with $1,000 deductible.

Comprehensive coverage with $1,000 deductible.

We used a 2019 Toyota Camry L in all cases and assumed 12,000 annual miles driven.

These are rates generated through Quadrant Information Services. Your own rates will be different.

Renters insurance rates

NerdWallet averaged rates for 30-year-old men and women for multiple insurance companies in every ZIP code across all 50 states and Washington, D.C. We also averaged rates by city. Sample tenants were nonsmokers with good credit living in a two-bedroom apartment.

They had a $500 deductible and the following coverage limits:

$30,000 in personal property coverage.

$100,000 in liability coverage.

$10,000 in additional living expenses coverage.

$1,000 in medical payments coverage.

These are sample rates generated through Quadrant Information Services. Your own rates will be different.

Home insurance rates

NerdWallet averaged rates for 40-year-old homeowners from a variety of insurance companies in every ZIP code across all 50 states and Washington, D.C. Sample homeowners were nonsmokers with good credit living in a single-family, two-story home built in 1997. They had a $1,000 deductible and the following coverage limits:

$300,000 in dwelling coverage.

$30,000 in other structures coverage.

$150,000 in personal property coverage.

$60,000 in loss of use coverage.

$300,000 in liability coverage.

Business owner and client looking at laptop screen.

A premium is the price you pay to an insurer for your small business insurance.

What is an insurance premium?

A premium is the cost of your small business insurance protection . You pay it initially when you purchase your coverage and then periodically to keep your insurance active. Premiums can be paid in full when you start your policy or through recurring monthly payments.

Why is it important to keep paying your insurance premium?

If you don’t pay your insurance premium on time and before your grace period expires, your insurer may cancel your coverage. This will leave your business exposed financially if it suffers property damage, a lawsuit, or another insurable event.

By paying your premium for insurance policies, such as general liability or commercial property , you will have a financial backstop in place to protect your business against the potentially devastating impact of a major incident.

Is a premium the same as a quote?

An insurance premium is not the same as an insurance quote . A premium is the actual cost of your policy, which an insurer determines through a process called underwriting .

A quote is an initial estimate of your cost based on your answers to limited questions about your business. To receive your actual cost or premium, you need to complete a more detailed insurance application.

You can compare insurance quotes from top U.S. carriers for free online with Insureon. Start an application today.

What factors determine the premium you’ll pay for insurance?

To determine your premium amount, your insurance company considers what type of small business insurance you wish to buy and how much coverage you are requesting.

The insurer will collect information about your business to determine your exposure to risk. For example, if you’re buying commercial property insurance , the insurer will want to know several details about your business, including:

The insurer will also consider your insurance claim history. It will seek to determine whether you’ve used your insurance frequently over the years. If so, you could be considered a costly business to insure, meriting a higher premium.

Each type of insurance has different factors to determine pricing. For example, the cost of general liability insurance is influenced by at least eight factors and several considerations will affect your premium for commercial auto insurance .

Who calculates your insurance premiums?

Insurers typically employ actuaries to make premium calculations. Actuaries often major in business or quantitative fields as undergraduates. They take nine intense actuarial exams over a six- to nine-year period. If they pass, they become a certified actuary.

Does an insurance premium always stay the same?

Your premium will remain the same for the entire policy period. However, when your coverage comes up for renewal, your insurer may opt to increase it.

Your carrier could increase your premium due to claims prior to your renewal or because of financial pressures caused by a catastrophic event or another widespread insurable event.

However, in many states, insurance commissioners have the power to constrain premium hikes. By statute, they require insurers to file their premiums for approval before applying them to their customers.

Compare quotes from trusted carriers

Insureon helps small business owners compare commercial insurance quotes with one easy online application. Start an application today to protect your business against legal liabilities.

What are insurance premiums, deductibles and limits?

Last updated : January 1

If you have an insurance policy, you've likely heard of premiums, deductibles and limits. But, do you know what each of these terms means? Each of these concepts helps determine how much you'll pay for your insurance (homeowners, auto, boat or life, for instance) — as well as how much you may receive after a covered loss.

Here's a guide to help you understand these terms.

get a personalized insurance quote today

What is an insurance premium.

An insurance premium is the amount you pay to your insurer regularly to keep a policy in force. You may be able to pay premiums monthly, quarterly, every six months or annually, depending on your insurance company and your specific policy. If you do not pay your insurance premium, your policy will be canceled and you will not have financial protection for claims.

How is the cost of an insurance premium calculated?

Many factors may affect the price of an insurance premium. Here are some of the factors that may affect how much you'll pay for a policy. The price you pay will be different if you are buying homeowners insurance, car insurance or life insurance.

Factors that may affect your homeowners Insurance premium

Source: National Association of Insurance Commissioners (NAIC)

Check with your insurer to see whether you qualify for home insurance discounts to help reduce the cost of your policy.

Factors that may affect your car insurance premium

Source: Insurance Information Institute (III)

You may be able to take advantage of car insurance discounts to help lower your premiums. Check with your insurer to see which discounts are available to you.

Factors that may affect your life insurance premium

Source: III

What is an insurance deductible?

Insurance deductibles are the amount of money you pay out of pocket toward a covered claim.

For example, suppose you select a $500 deductible when you purchase dwelling coverage on your home insurance policy. Later, a fire causes $10,000 of damage to your home. If your claim is covered, you'd pay your $500 deductible toward repairs, and your insurance would pay the remaining $9,500.

When you meet your deductible, it means that you have paid the entire amount of your coverage's deductible, and your insurance will help cover the remaining costs of your covered claim, up to your coverage limit.

You'll likely have multiple deductibles on the same insurance policy. That's because each coverage may have its own separate deductible. Unlike health insurance, where you usually have to meet a single deductible for an entire calendar year, deductibles for other types of insurance policies generally apply each time you make a claim.

In some cases, your insurance company may set deductibles for particular policies. In other cases, you may be able choose your deductible. You may be able to save money on premiums by choosing higher deductibles. In general, the higher your deductible, the lower your premium will be. For example, if you choose a $1,000 deductible on your auto policy, you will likely pay less in premiums than you would for a policy with a $250 deductible.

Check your policy or contact your insurance agent to find out what deductibles may be in effect for your policies or to adjust the amount of your deductible.

What is an insurance limit?

An insurance limit is the maximum amount of money an insurer will pay toward a covered claim. The higher your coverage limit, the higher your premium may be. Limits often apply to different types of coverage within a policy. For example:

Homeowners insurance

You'll likely want to consider a number of factors when choosing your homeowners insurance coverage limits. These may include:

An insurance agent can help you review what specific types of coverage may be available to fit your situation.

Auto insurance

Typical auto insurance policies include separate limits for different types of coverage, such as:

Stories & tips for everyday life

Insurance Premium

The amount of money that an individual is required to pay to an insurance company in order to receive insurance coverage

What is an Insurance Premium?

An insurance premium is the amount of money that an individual is required to pay to an insurance company in order to receive insurance coverage.

Your insurance company will pool together all the money that individuals pay for premiums, which will then be paid out to individuals who need to be covered for financial losses as a result of events or incidents stated in the contract between you and the insurance company . Alternatively, the insurance company may choose to use the money they earn from premiums to invest to generate even higher returns for the insurer.

Depending on your insurance company, you may need to pay on a monthly, semi-annual, annual basis, or even a lump sum before your coverage begins. Additionally, the insurance premium will vary depending on what type of insurance you purchase and the risk for financial losses to be incurred.

Types of Insurance Premiums

There are many different types of premiums about various insurance policies, including, but not limited to:

Life insurance premiums are determined by your personal information, including your age, health, and medical record. Factors such as whether or not you smoke or consume alcohol will also determine the amount of premium you will need to pay.

Some individuals may receive health insurance coverage from their employer, so they may not need to pay for the premium. Without coverage provided by your employer, it means that the lower the amount of premium you pay, the more medical expenses you will need to pay out of your own pocket.

When you are purchasing auto insurance, the insurance company will be looking at your driving records , such as violations, parking tickets, license suspensions, and driving accidents. A driver with a clean driving record will be charged with a smaller premium than a driver with a record consisting of accidents and violations.

4. Homeowners

Homeowners’ insurance premiums are determined by the age, size, value, and location of the property. Houses located in areas that are more prone to extreme weather conditions, such as hurricanes or tornadoes, will tend to have higher insurance premiums.

The amount of premium you need to pay will depend on the amount of coverage and deductible. It will also depend on your location, credit score , and how many insurance claims you’ve filed in the past. The more coverage you get, the more expensive the premium will be.

What Determines an Insurance Premium?

The amount of insurance premium differs for each person. It will depend on several factors, such as:

Who Determines an Insurance Premium?

Actuaries in insurance companies are responsible for determining how much you should pay for insurance premiums using statistics and mathematics. They will determine the likelihood that you will encounter an event or accident that will require you to receive insurance coverage. The costs associated with the coverage are also calculated.

Using the above factors to determine the insurance premium, actuaries will then come up with a price for the insurance company to charge you, so the amount they are receiving is greater than the amount the company needs to pay for insurance claims.

The information that actuaries collect is then put into a table called an actuarial table , which is then given to the insurance underwriter, who will establish the pricing for the premium.

The Impact of Insurance Deductibles

Almost all insurance policies come with a deductible, except for life insurance. A deductible refers to a specific amount of money that you will need to pay out of your own pocket to cover financial losses before the insurance company covers the rest.

The more you pay for the deductible, the less you pay for the premium. On the other hand, the less you pay for the deductible, the more you pay for the premium.

More Resources

CFI is the official provider of the Certified Banking & Credit Analyst (CBCA)® certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

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COMMENTS

Insurance Premium Defined, How It's Calculated, and Types
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
What Is an Insurance Premium?
What Is an Insurance Premium? ... A premium is the price you pay to buy an insurance policy. Premiums are your regular payments for many common insurance policies
How Insurance Companies Set Health Premiums
How insurance companies set health premiums ... Five factors can affect a plan's monthly premium: location, age, tobacco use, plan category, and whether the plan
Insurance premium: What is it and how does it work?
An insurance premium is the amount the policyholder agrees to pay in exchange for coverage. It guarantees financial compensation for the damages
What Is a Car Insurance Premium?
Your car insurance premium is the specific amount of money you pay a company to provide insurance protection for yourself and your vehicle. Premiums are usually
What Is an Insurance Premium?
An insurance premium is the amount you pay for an insurance policy. Simply put, premiums are what you pay insurance companies in exchange for
What Is a Business Insurance Premium?
Learn the role of a premium in business insurance. Compare insurance quotes online for free with Insureon.
What is an Insurance Premium?
You may be able to pay premiums monthly, quarterly, every six months or annually, depending on your insurance company and your specific policy.
Insurance Premium: What Is It & How Does It Work?
Insurance premiums are usually a monthly charge that's determined by your insurance company, and if you enroll through work
Insurance Premium
An insurance premium is the amount of money that an individual is required to pay to an insurance company in order to receive insurance