By, Director of Content Marketing
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.
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.
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.
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.
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.
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.
If you’ve had insurance in the past, had an accident or made any claims, this will also be considered in your insurance premium.
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.
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.
Coverage is bound to affect your premiums. The more you want, the more expensive your premiums will be.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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.
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 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.
If you want to include dependents, such as your spouse or children, your premium will likely increase.
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.
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.
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.
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.
In some states, insurers are allowed to factor in your credit score when determining your premium.
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.
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.
Length of Trip
The longer you plan to stay overseas, the more you open yourself up to risks and travel interruption.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
New ZIP code
Location is often a significant factor in many insurance types. Moving or relocating can affect your insurance.
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.
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.
Bundle your insurance
Purchasing different types of insurance —home, auto and medical — from a single insurer can lower your premium.
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.
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.
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.
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.
- What can impact insurance premiums?
- How can consumers lower their premiums across different types of insurance policies?
President of Bering Insurance Partners
CEO of Seniors Mutual
Owner of Sessions Insurance
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 Nathan Paulus
- American Society for the Prevention of Cruelty to Animals. "Cutting Pet Care Costs." Accessed January 6, 2022.
- Harvard Health Publishing. "Why men often die earlier than women." Accessed January 6, 2022.
- Health.gov. "How insurance companies set health premiums." Accessed January 6, 2022.
- Health.gov. "The 'metal' categories: Bronze, Silver, Gold & Platinum." Accessed January 6, 2022.