Featured Experts

Insurance Premium

Last Updated: 8/11/2022
Advertising & Editorial Disclosure
By     |  

What Is an Insurance Premium?

An insurance premium is how much you pay to get an insurance policy, be it for healthcare, home, auto or life insurance coverage. Premiums can be paid on a monthly, quarterly, semi-annual or annual basis and some can even be paid in full prior to starting the policy. Insurance premiums are calculated based on a number of factors, such as the type of policy you’re getting, your personal details and what coverage you’re seeking.

Loading...

How Does An Insurance Premium Work?

An insurance premium is the amount paid to providers to get insurance coverage. Depending on the provider, you can pay for your policy monthly, quarterly, semi-annually or annually. You can also choose to pay your premium in one lump sum. Failure to pay the premium upon the agreed due date can lead to the cancellation of your policy.

For instance, if you get a health insurance policy and make regular payments every quarter, you won’t have any problem when making a claim.

How Much Is An Insurance Premium?

Insurance premiums fluctuate and often, no two are alike. This is because every insurer calculates them differently. For instance, you and your family member may have the same auto coverage, but they pay more for theirs than you do. This could be contributed to the difference between you, such as your assessed levels of risk, driving records or vehicle types. This is why it is helpful to shop around for coverage and compare policies and premiums of various providers.

Note, however, that a premium can increase or decrease if you adjust your coverage. For instance, an auto insurance policy with a $2,000 deductible will be cheaper on a monthly basis compared to one with a $500 deductible even though they have the same coverage. This also applies to other policy types.

tip icon
DON'T SETTLE FOR THE CHEAPEST PREMIUM

The policy with the cheapest premium is not always the best option and may lack the coverage that you need. Evaluate your situation and determine what you need coverage for to find the plan that works best for you at your price point.

An illustration of a girl calculating her premiums in front of a desktop.

How to Calculate Insurance Premiums

Insurance premiums can vary based on a number of factors, such as the type of policy you get, the amount of coverage you need and your personal details. Every provider calculates their premiums differently and their considerations are often not privy to the public, but there are many criteria that all insurers consider.

Who Determines the Insurance Premium?

Generally, insurance companies are responsible for determining your premium. Each company has their own unique method of calculating your premium, but they may have a base rate available based on certain details such as your age and location.

The base rate and other ways your insurance premium is determined is calculated by an actuary. They are responsible for determining the level of financial risk a person or group can pose based on statistics, their lifestyle, health and other factors. This way insurers can price your plan where they also make a profit.

Common Pricing Factors That Impact Insurance Premium

Amongst all types of insurance policies, there are a few common factors that can impact your premiums.

1

Age

Your age can predict the likelihood of you filing a claim. For instance, teens with auto insurance are likely to be seen as high-risk due to driving inexperience. Therefore, they will have a higher premium. Similarly, health insurance for the elderly may be more expensive as they are more likely to have health issues as they age.

2

Location

Where you live can sometimes expose you to certain risks not present in other areas, which can increase or decrease your premiums. For example, home insurance in an area that often experiences flooding may be more expensive compared to a home located on higher ground.

3

History

If you’ve had insurance in the past, had an accident or made any claims, this will also be considered in your insurance premium.

4

Credit score

For some types of insurance policies, and depending on the state you’re in, your credit score will be considered. This is to determine your likelihood of defaulting on payments.

5

Insurance provider

Your chosen insurance company may weigh criteria differently, which can impact your premiums. This is why shopping around and comparing quotes between different insurers is the best way to find the cheapest policy for you.

6

Coverage

Coverage is bound to affect your premiums. The more you want, the more expensive your premiums will be.

7

Deductible

Your deductible is how much you pay out-of-pocket before insurers can pay for the rest of your claim. This can apply to your auto, health, home, renters, travel and pet insurance policies.

Your unique situation can still determine whether your premiums are high or low and discounts are often available. Learn more about the different factors that can affect certain types of insurance policies below.

Auto Insurance Premiums

On average, a driver pays around $1,424 per year for a full coverage auto insurance policy with 100/300/100 in liability limits. However, auto insurance policies can be priced very differently based on your coverage, your personal details, your driving history and the make and model of your car.

For instance, car insurance for teens and young drivers is likely to be far more expensive compared to auto insurance for an average, 40-year-old driver with a good driving record.

  • Factor
    Description
  • Age
    Auto insurers use your age to determine your premium, as young drivers lack the necessary experience on the road and older drivers may be more at risk due to health complications.
  • Location
    Where you drive plays a role in your auto insurance premium, as more congested roads tend to have more accidents. Each state also has their own minimum coverage that insurers have to follow.
  • Driving Record
    Insurers look at your history to see what type of driver you are. If you have a lot of accidents or tickets, insurers may view you as a high risk candidate.
  • Coverage
    Prices can easily change as you add or decrease coverage in your auto insurance policy. A full coverage policy with higher liability limits is likely to be more costly compared to a policy that only follows your state’s required minimums.
  • Vehicle Type
    Your car’s make, model and year also impacts your insurance costs. For instance, an older car made in 2001 may be more expensive to insure compared to a car from 2019, as the latter has all the latest anti-theft technology required to mitigate any risks.

Life Insurance Premiums

The average life insurance premium varies based on term length and coverage amount. For example, a 10-year, $100,000 policy from Nationwide would cost $11.55 on average, but cost $15.75 for a 10-year, $500,000 policy. However, other factors like your age, gender and health history can still affect your premium.

  • Factor
    Description
  • Policy Type
    There are two types of life insurance: term and policy. Term life insurance expires after a set number of years, which is less expensive. On the other hand, life insurance can accumulate cash value over time, which can affect your premiums and make it more costly.
  • Coverage
    The amount of coverage or death benefit your beneficiaries will receive can also affect your premium. You can choose from a small death benefit of a few thousand up to a million or more. The more coverage you need, the higher your premium.
  • Age
    Insurers look at your age and life expectancy. Obtaining life insurance at a younger age is often cheaper as you’re statistically less likely to die. The opposite is also true: the older you are, the more expensive your life insurance premium may be.
  • Gender
    Gender is another factor that insurers consider to determine your life expectancy. Statistically, a woman’s lifespan is five years longer than a man's in the U.S. and seven years longer worldwide.
  • Health History
    The biggest determinant of your life expectancy is your medical history, where some insurers even require that you take a medical exam. Having less than perfect health can make your premiums increase, as the insurer will deem you high risk.
  • Hobbies and Occupation
    Your hobbies and occupation can also affect your premium. If you’re in a high-risk career, such as being a construction or aviation worker, premiums are often high given the increased likelihood of death. The same applies if you have a risky hobby, such as skydiving.

Health Insurance Premiums

The average cost of health insurance depends on your state. For instance, on average, Maryland has the most affordable health insurance at $338 per month, while West Virginia has the most expensive at $712 per month. Other considerations in your health insurance premium include your age group, family size and plan type.

  • Factor
    Description
  • Location
    Your place of residence is a significant factor that affects your health insurance premiums. This is because insurers have to account for different state and local laws, competition and costs of living.
  • Age
    Age is another key factor that insurers consider. This is because as you age, you’re more at risk of illness. Older adults are likely to have premiums that are three times higher compared to younger individuals.
  • Family
    If you want to include dependents, such as your spouse or children, your premium will likely increase.
  • Plan Category
    In health insurance, there are four metal categories: Bronze, Silver, Gold and Platinum. This determines how you split the cost of healthcare between yourself and your insurer.
  • Use of Tobacco
    If you’re a smoker, health insurers are liable to charge you more. This is because you are higher risk of contracting illnesses due to your smoking habits.

Homeowners Insurance Premiums

While not legally required, home insurance is a necessity if you want to protect your most important asset. The average home insurance premium is $1,979 per year, but this can still change depending on your home’s location, its age, construction type and more. To find the most affordable home insurance policy, make sure to compare quotes and offers between insurers.

  • Factor
    Description
  • Location
    Where you live can determine the likelihood of you filing a claim. For example, if you live in a hurricane zone, you’re likely to have a higher premium.
  • Dwelling Coverage
    Your dwelling coverage amount is how much you will be insured for on your home. The more expensive your home is to rebuild, the higher your dwelling coverage should be and your premiums costs will follow.
  • Personal Property Amount
    Homeowners insurance covers your personal property. If you have a lot of high value items in your home that you would like to cover, expect a higher premium.
  • Home’s Age and Condition
    Older homes may have materials that are harder to replace, which can increase your premiums. The overall condition of your home is also taken into account, as an older home may be prone to damages such as leaks or fires.

Renters Insurance Premiums

Renters insurance premiums stand at an average of $13 per month, or $159 per year, for a policy with $20,000 in personal property limits, $100,000 in liability coverage and a $500 deductible. Generally, it’s easy to find affordable renters insurance as the average is not at all that high. Additionally, renters insurance premiums are based on only a few factors: your location, credit score, coverage and security devices.

  • Factor
    Description
  • Location
    Like with home insurance, where you live can affect the premiums for renters insurance. Renting in areas prone to crime or weather and natural disaster risks may lead you to pay a higher premium.
  • Credit Score
    In some states, insurers are allowed to factor in your credit score when determining your premium.
  • Coverage
    Renters insurance covers your personal property and your liabilities. If you choose to increase the limits of either coverage, such as covering your valuables or a high dollar property, expect to pay more in premiums.
  • Security Devices
    Having security devices, such as a home security system, can help lower your premium.

Travel Insurance Premiums

Travel insurance premiums often range between 4% and 8% of your trip’s total cost. However, your total cost depends on the type of travel insurance you get, the length of your trip, where you’re going, your age and more. Keep in mind that the best travel insurance isn’t always the most expensive, as it depends on where you’re going and what you’re doing.

  • Factor
    Description
  • Length of Trip
    The longer you plan to stay overseas, the more you open yourself up to risks and travel interruption.
  • Destination
    High-risk destinations can make your travel insurance premium rise. For instance, if you’re traveling to a country that is experiencing conflict or has high rates of crime, your premium will rise in order to protect you from such risks.
  • Age
    Older travelers are viewed as having more risk due to their likelihood of getting into an accident or experiencing a health issue. As a result, older adults' travel insurance premiums are often higher.
  • Coverage
    There are many additional types of coverage you can get with your travel insurance policy, such as financial travel protection, medical coverage and 24-hour assistance. These are often bundled in travel insurance policy offers, but they can also be bought alone if preferred.
  • Number of Travelers
    The more people there are on the policy, the more expensive your premiums will be. This is because a group of five is seen to have more risk compared to a solo traveler or a couple.

Pet Insurance Premiums

On average, dog owners spend $225 per year for routine medical costs while cat owners spend $160. This can jump tremendously if there is an accident or other issue, which is why having pet insurance is so valuable. Health insurance for dogs can average $516 per year compared to $348 on average for cats. This price can differ, however, based on your level of coverage, add-ons and more.

  • Factor
    Description
  • Breed of Pet
    Your pet’s breed will determine what coverage options you have.
  • Age of Pet
    Older pets may no longer be eligible for new policies and based on their breed, they may not qualify for a policy. Note, if they do qualify, a higher premium is possible.
  • Location
    Certain carriers only operate in select states and limits your access to qualified pet care, which can impact your premiums. The higher the cost of treatment in your area, the higher your premiums.
  • Type of Plan
    There are different types of pet insurance policies you can purchase. Some only offer accident coverage, while others cover illnesses. What you get will determine your premium.
  • Add-Ons
    For a higher price, add-ons, often known as riders, can provide additional coverage. For example, many policies do not cover cancer treatment; however, riders can be acquired to provide cancer coverage.
An illustration image of a woman saving her money for insurance premiums to a piggy bank.

What Impacts Insurance Premiums?

Most insurance premiums aren’t fixed and can change based on a number of factors. Every time your policy ends, insurers can increase or decrease your premium based on assessed risk or if your coverage has changed. For instance, teen drivers' premiums can decrease once they have gained driving experience and are not assessed to be high risk.

What Causes Insurance Premiums Change?

Insurance premiums often increase as you age or as situations in your life change, which is something you should be able to financially account for. Understanding what can impact your insurance premiums can help you account for potential increases and seek discounts as needed. The following are some of the most common factors that can impact your premiums.

  • This is an icon

    Age

    Your level of risk changes as you age. Insurers will adjust your premiums accordingly for your new level of risk. For instance, your health insurance may become more expensive as you grow older as you may require more care and medical coverage.

  • This is an icon

    Claims

    A single claim on your record will not automatically increase your premiums by a high number, but having a lot of claims on your record can affect the way insurers see you. The more claims you make, the riskier you are to insure.

  • This is an icon

    Credit score changes

    Your credit score increases or decreases, it can impact your policy’s premium and will be reflected in what you pay. For instance, if you are due for a policy renewal and your credit score has since gone up, you can expect to pay a lower premium.

  • This is an icon

    New ZIP code

    Location is often a significant factor in many insurance types. Moving or relocating can affect your insurance.

  • This is an icon

    Insurer's calculations

    For home and vehicle insurance policies, insurers calculate various external factors to assess risk which can increase and decrease premiums. For example, today an auto insurer may assess a traffic area as low-risk, but a year from now it may be assessed differently due to property changes and newly emerging areas of traffic congestion.

Examples of Insurance Premium Adjustments

An insurance premium adjustment is a provision on your policy that allows the insurer to adjust your premium during or at the end of the policy. While this happens for a number of reasons, it often occurs during renewal when insurers reevaluate the current circumstances.

For example, if you’re renewing an auto insurance policy after being in an accident, you can expect it will be factored into your new premium. Accidents can increase your premiums by an average of 56.8% or $783. This means that if you originally paid $1,500 per year for auto insurance, you can expect to pay $2,283 after your renewal.

How Do Deductibles Affect Insurance Premiums?

Your insurance policy includes a deductible, which is the amount you pay out of pocket before your insurance plan starts to pay for your claim. You can choose to adjust your deductible by paying a higher or lower amount for your insurance policy.

For example, a home insurance policy with a deductible of $250 will lead to a higher annual expense compared to having a deductible of $2,000 for the same coverage. In California, a policy with a $250 deductible costs $1,231 per year on average, while a policy with a $2,000 deductible can be up to $315 cheaper on average.

5 Ways to Get the Lowest Insurance Premiums

Insurance coverage is necessary. It keeps you, your belongings and additional individuals safe and financially protected from unknown risks, accidents and disasters. It doesn’t mean, however, that it has to be expensive. You can get an affordable insurance policy that fits your needs by carefully reviewing your choices and taking your time selecting your policy. The following points can also help you lower your insurance premium.

1

Opt for discounts

Many insurers offer a variety of discounts that are often easy to get. For instance, in home insurance policies, you can get a discount for having a security system installed.

2

Bundle your insurance

Purchasing different types of insurance —home, auto and medical — from a single insurer can lower your premium.

3

Increase your deductible

A higher deductible can lower your payments. Keep in mind that this means you’ll have a higher amount due in case of an accident.

4

Improve your credit score

Steadily improving your credit score is a beneficial long-term strategy that demonstrates to insurers that you are reliable and make on-time payments, which can lower your premiums.

5

Compare quotes

Don’t settle for the first insurer you research or speak with. Shop around and get quotes from different providers to find the most affordable policy for your needs.

Insurance Premium FAQs

Below are a few frequently asked questions (FAQS) about insurance premiums to help you better understand what to look for and consider as you’re shopping for your policy.

Expert Insights

Understanding insurance premiums can be tricky considering all the insurance terminology. To help you better grasp the concept, MoneyGeek reached out to several industry experts to provide their insight and recommendations.

  1. What can impact insurance premiums?
  2. How can consumers lower their premiums across different types of insurance policies?
Haydn Sessions
Haydn Sessions

Owner of Sessions Insurance

Kelly Maxwell
Kelly Maxwell

CEO of Seniors Mutual

Michael Cohen
Michael Cohen

President of Bering Insurance Partners

Related Content

Insurance premiums is a commonly used term across different insurance policies. Learn more about other insurance types in the following MoneyGeek guides.

  • Car Insurance 101 Guide: What a Beginner Needs to Know About Car Insurance: Learn about the basics of car insurance such as what it covers, how much coverage you need and more.
  • Health Insurance Glossary: Find out more about health insurance terms in this glossary resource to help increase your understanding of what policies cover.
  • Types Liability Insurance, Where to Buy & Who Needs It: Liability insurance is often part of your basic insurance policy. Explore the different types of liability insurance across various policies to understand what you need.
  • What is Term Life Insurance and How to Buy a Policy: Term life insurance is one of the most common and affordable types of life insurance purchased today. Learn more about who needs term life insurance, the different types and how to pick the right policy for you.
  • What is Whole Life Insurance and How to Buy a Plan: Whole life insurance is meant to last exactly that — your whole life. Learn more about what whole life insurance is, its pros and cons, how to shop for it and more.

About the Author


expert-profile

Nathan Paulus is the director of content marketing at MoneyGeek. Nathan has been creating content for nearly 10 years and is particularly engaged in personal finance, investing, and property management. He holds a B.A. in English from the University of St. Thomas Houston.


sources