If you have an insurance policy, you might wonder how companies calculate your insurance premiums. You pay insurance premiums for policies that cover your health—and your car, home, life, and other valuables. The amount that you pay is based on your age, the type of coverage that you want, the amount of coverage that you need, your personal information, your ZIP code, and other factors.
Key Takeaways
- An insurance premium is the amount of money that you pay for an insurance policy.
- You pay insurance premiums for policies that cover your health, car, home, life, and others.
- Insurance premiums vary depending on your age, the type of coverage, the amount of coverage, your insurance history, and other factors.
- Premiums can increase each time you renew an insurance policy.
What Is an Insurance Premium?
When you have an insurance policy, the company charges you money in exchange for that coverage. That cost is known as the insurance premium. Depending on the health insurance policy, you might pay the premium each month or on a semiannual basis. In some cases, you might be required to pay the full amount up front, before coverage starts.
Most insurance companies offer a variety of ways to pay your bill, including online options, automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and bank drafts. You may qualify for a discount if you sign up for paperless billing options or if you pay the full amount all at once instead of making minimum payments.
How Much Is an Insurance Premium?
There’s no set cost for insurance premiums. You could have the same car as your neighbor and pay more (or less) for insurance—even with the exact same coverage. It pays to shop around and compare prices and policies. There are insurers who offer a cash flow payment plan where your annual premium is broken into smaller payment units.
You’ll pay more for broader coverage. For example, a health insurance policy with a $1,000 deductible will be pricier than one with a $5,000 deductible. Similarly, a car insurance policy with a $0 deductible will be more expensive than a policy with a $500 one, all other factors being the same.
Still, that doesn’t mean you should automatically go for the cheapest policy just to save money. It’s essential that you consider your situation—and the likelihood that you’ll need to use that policy—when choosing the plan that will work best for you.
How to Calculate Insurance Premiums
Insurance companies consider several factors when calculating an individual's insurance premiums. Group insurance providers will also look at these factors when they calculate the premium for a group.
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- Your age: Insurance companies look at your age because that can predict the likelihood that you’ll need to use the insurance. With health insurance, younger people are less likely to need medical care, so their premiums are generally cheaper. Premiums increase as people age and have a higher chance of needing more medical services. And teenage drivers are still working on building experience, so their auto insurance is more expensive. Likewise, older drivers—who tend to have slower reflexes—will also pay more.
- The type of coverage: In general, you have several options when you buy an insurance policy. The more comprehensive the coverage that you get, the more expensive it will be. For example, if you have an auto insurance policy that covers liability only, it will be cheaper than if you have a plan with collision, comprehensive, liability, medical payments, and uninsured/underinsured motorist coverage.
- The amount of coverage: The less coverage, the cheaper the premiums—no matter what you’re insuring. For example, if you buy health insurance, you’ll pay lower premiums for the same type of coverage if you have a higher deductible and a higher out-of-pocket maximum. Similarly, it will cost more to insure a $400,000 home than a $200,000 home.
- Personal information: Depending on the type of insurance for which you’re shopping, the insurance company may take a close look at things like your claims history, driving record, credit history, gender, marital status, lifestyle, family medical history, health, smoking status, hobbies, job, and where you live.
- Actuarial tables:Most insurance companies employ actuaries—business professionals who assess the risk of financial loss, using mathematics and statistics to predict the likelihood of an insurance claim, based on much of the aforementioned criteria. They typically produce something called an actuarial table that is provided to an insurance company’s underwriting department, which uses the input to set policy premiums.
95%
The percentage of car insurance companies that consider credit ratings when calculating insurance premiums.
How to Lower Your Premiums
Insurance companies are all about risk assessment. The higher the risk, the higher the premiums. Still, there are ways to lower your premiums.
One way is to bundle your insurance. For example, if you have your auto, home, and life insurance policies with one company, then you’ll probably qualify for a discount.
Of course, you can save money if you reduce your coverage (e.g., increase your deductible). However, that’s not always a good choice. Consider your situation and the likelihood that you’ll use the policy before making any decisions.
There are other ways to save on your premiums, but they take more of a commitment. For instance, most states charge smokers up to 50% more than nonsmokers for health insurance policies. As an example, if you’re a smoker paying $600 a month for health insurance, you might be able to reduce your premium to, say, $400 if you quit smoking.
Another example: You may qualify for lower auto insurance rates if you improve your credit score. That’s because people with lower credit scores are, statistically speaking, more likely to file a claim.
How Much Are Insurance Premiums?
Insurance premiums vary based on the coverage and the person taking out the policy. Many variables factor into the amount that you’ll pay, but the main considerations are the level of coverage that you’ll receive and personal information such as age and personal information. For car insurance, that could mean age and driving record. For health insurance, it could be based on personal habits such as smoking or on preexisting conditions.
Does a Higher Insurance Premium Mean Better Insurance?
Not necessarily. Because so many variables go into determining your premium, your premium may be higher than someone else’s for the exact same coverage. Typically, you’ll pay a higher premium for more extensive coverage, such as a lower deductible, or for more added services, such as roadside assistance or rental car coverage.
How Can I Lower My Insurance Premiums?
The most foolproof way to lower your premiums is by choosing a lower level of coverage. If you like the coverage that you have, consider bundling—combining several different types of insurance—to qualify for multi-policy discounts. For health insurance, some companies offer incentives to build healthy habits, such as getting a yearly health assessment or trying to quit smoking. Some car insurance companies will also lower your premiums based on a good driving record or credit score.
The Bottom Line
Several metrics factor into the price of an insurance premium, including age, state and county of residence, and amount of coverage. You cannot change your age, obviously, but you can take advantage of incentives to lower the cost by, for example, quitting smoking or improving your credit score. Whether or not you bundle your insurance, change a health habit, or improve financial picture, it always pays to shop around. That way, you can find the best insurance policy at a price that you can afford.
