Insurance Premium

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:

1. Life

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.

2. Health

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.

3. Auto

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.

5. Renters

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:

• Type of Insurance Coverage: A more comprehensive insurance policy that provides you more coverage than another policy will result in a more expensive premium.
• Amount of Insurance Coverage: Premiums are less expensive if the amount of coverage is less.
• Insurance History (and any past claims made)
• Personal Information: The policyholder’s age, place of residence, marital status, lifestyle, medical history, credit history, driving record, and employment status

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 global Financial Planning & Wealth Management Professional (FPWMP™) certification program, designed to help anyone become a world-class financial planner. To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

• Adjustable Life Insurance
• Automatic Premium Loan
• Financial Analyst vs. Actuary
• Insurance Deductible
• See all wealth management resources