What Is an Insurance Premium?
Chances are you have plenty of coverage, including policies for your car, your home (either homeowners or renters), and even your life. All this protection comes at a cost — specifically, the premiums you pay each month.
However, many people struggle with some basic questions: What is an insurance premium — or more specifically, how is the amount you pay calculated? And what can you do to reduce costs while improving coverage?
You have questions, and we have answers. Keep reading to discover everything you need to know about premiums.
Defining Insurance Premiums and Their Role in Your Coverage
It can be difficult to understand how underwriters calculate premiums and how these premiums affect the quality of your overall coverage. Once you understand how everything works, though, you get the best of both worlds — the highest-quality coverage at the most competitive prices, all without paying for more than you really need.
Behind the Scenes: How Premiums Are Determined
How do insurance premiums work? Simply put, this is the bill you pay each month for your different coverage plans.
You may have noticed your monthly bills creep up year by year. What exactly is driving up these prices, and is there anything you can do to control the overall cost?
This can be complex and confusing when you try to take it in on your own. The good news is the information below will simplify everything, helping you save time and money in the coming years.
Insurance Risk Assessment Explained
If you want the deeper truth to the question “How do insurance premiums work?” you need to understand how carriers assess risk. In short, the likelier they think you are to file a claim, the more expensive your coverage.
Age and Lifestyle as Prime Determinants
With multiple kinds of coverage, age is a major factor when it comes to how much you pay. Age can be a double-edged sword: younger drivers pay more for their auto premiums, and older drivers typically pay less, though rates go back up for elderly drivers.
Life insurance premiums, meanwhile, are almost always cheaper for younger people, which is why so many like to lock in term policies when they are younger and relatively healthy.
Speaking of health, lifestyle factors may determine how much you pay for those life coverage premiums. Someone who drinks and/or smokes, for example, is considered riskier to insure than someone who does not, and the carrier will set your rate accordingly.
The Impact of Location and Claims History
Where you live can play a major factor in how much you pay for coverage. If you live in a more dangerous area (or just one with plenty of claims), then you are likely to pay more for things like your homeowners insurance premium or renters insurance premium. The good news is that moving — even simply moving to a better zip code in the same city — can reduce how much you pay.
Regardless of where you live, another factor that drives up premiums is how many claims you have made. In general, someone who has made several claims before is likely to do so again. This is why it is often advisable to fix minor damage rather than file a claim that could permanently drive up your rates.
The Actuarial Science Factor
Your carrier also relies on complex actuarial science to set the prices for customers. This science looks at things like mortality rates and life tables to more precisely understand the risks of insuring individuals and calculate the fairest possible rate for them to pay after accounting for all the different risk factors.
Types of Insurance and Their Premiums
The main common denominator for any form of coverage is that you must pay a premium to keep your coverage active. For every type of coverage, there is a different premium, and different factors can help you drive these rates higher or lower.
Auto Insurance Premiums
There are many factors affecting your car premium that you cannot really control, including your age and your gender. There are some ways drivers can get a lower insurance premium, though, including changing where you live, improving your driving record if you have blemishes and increasing your credit score. The age and value of your car are also big factors, and downsizing a vehicle can also downsize your premium.
The most important factor is driving history: if you can avoid moving violations and traffic accidents, you may qualify for a safe driving discount (for that matter, always ask your carrier about other auto discounts for which you might qualify).
Homeowners Insurance Premiums
By far, the biggest factors affecting your homeowners insurance premium is the location of your home and the construction and building materials. If your residence area is frequently hit with anything from burglaries to tornadoes, then it will be more expensive to insure. The age of the home is also a major consideration, as older homes are more likely to have something go wrong.
Outside of buying a newer home in a safer location, there is only so much you can do to lower this premium, but improving your credit score is always a good choice.
Renters Insurance Premiums
Most of the same factors affecting homeowners coverage, like the location and age of the home, also affect your renters premiums. If you want to lower how much you pay, you might consider changing your coverage types (an actual cash value plan is typically cheaper than a replacement cost plan) or tweaking your deductible amount. And, as always, you can shop around for better rates from other carriers.
Life Insurance Premiums
The cost of your life insurance premium is partially determined by some surprising factors, including your driving record. However, the main factors are what you might expect: age, health, medical history, and lifestyle choices.
You cannot change how old you are, of course, but avoiding alcohol and nicotine while striving to stay in shape can help keep your rates low even as you age. Again, you may wish to consider a term policy so you can “lock in” a rate for up to 30 years when you are relatively young and healthy.
Find An Affordable Premium With Quality Coverage
Now you have an answer to that surprisingly vexing question: What is an insurance premium? You know about the different kinds of coverage and the factors that drive up your bill each year. Most importantly, you know how to take control of certain factors to help you save money each month.
But do you know who you can trust for white-glove, customized service for all your coverage needs? At InsureOne, our expert insurance agents are here to offer all the plans you need at the best prices, especially once you begin bundling. When you are ready to take control of your coverage like never before, come get a quote online. Of course, you can also pick up the phone and give us a quick call at 800-836-2240. Finally, feel free to find an InsureOne office near you.
Frequently Asked Questions About Insurance Premiums
As you can tell, “What is an insurance premium?” is a surprisingly complex question. In fact, it is a safe bet that you still have a few questions, especially about what you are paying for and what affects the overall cost.
Below, you will find answers to the most frequently asked questions regarding premiums. After that, you should be able to select a plan that best suits the needs of yourself and your family.
What Is the Difference Between an Insurance Premium and a Deductible?
Coverage premiums are what you pay each month (unless you pay annually) to continue receiving coverage. The deductible is the amount you must pay out-of-pocket before the carrier will cover anything. For example, you will pay a certain deductible amount for a car policy claim before the carrier pays for the rest of the damage.
Why Do My Premiums Keep Increasing Each Year?
Any combination of the factors mentioned above can drive up your premiums. As an example, age affects rates, and everyone gets older by the year. Filing claims tends to drive up rates.
Additionally, since your location affects how much you pay, your automobile premium rates may increase if those around you are filing more claims or getting into more car accidents, even if you remain a very safe driver. Any type of major storm or wildfire in your area may result in increased home insurance costs the next year.
Can I Negotiate My Insurance Premiums With Providers?
Generally, you cannot truly negotiate premiums with your provider, though you are always welcome (and encouraged) to shop around with different carriers to get the best possible rates.
There are secrets to “negotiating” a better car insurance premium, however, that include asking about bundles and discounts and tweaking the amount of your deductible or simply changing your coverage.
How Does the Frequency of Payments Affect the Total Cost of Insurance?
While it is not a universal rule, many carriers offer discounts to customers who pay annually for their coverage rather than month-to-month. Of course, the advantage of paying month-to-month is that you can always switch to another carrier for a potentially better rate, so it is worth pondering whether you want to lock into a certain plan and premium for an entire year.
How Often Should I Review My Insurance Policies and Premiums?
As a general rule, it is good to review your life and home insurance (either homeowners or renters) premiums once per year. With automobile coverage, you may wish to review every six months instead. However, for policies where you pay by the month, keep in mind that you can always shop around and switch carriers as needed.