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What Is an Insurance Premium?

The security and peace of mind of having an insurance policy can be significant. But insurance coverage isn't free. It comes with a price. The premium is the price policyholders pay an insurance company for an insurance plan.

The policyholder pays the premium costs in exchange for insurance coverage. The insurance company must provide benefits according to the insurance policy terms. The article below discusses insurance premiums and their role in insurance policy costs.

How Insurers Calculate Insurance Premiums

Many factors determine your insurance premium for a given insurance policy. The critical component insurance providers evaluate is your risk factor. The policyholder's insurance costs, including the premium amount, are primarily determined by the likelihood of you filing a claim for insurance benefits.

Other factors, such as whether you pay premiums in monthly installments, semiannually, or annually, can impact the cost of your premium. Understanding the factors affecting premium rates can potentially help you save money.

How Are Premiums Determined for Different Types of Insurance

Insurers and their actuaries analyze different data points to evaluate risk and determine the premium cost. Many variables factor into premium determinations. The metrics given the most weight depend on the type of insurance at issue.

Insurance companies try to diversify their pool of insured people among low- and high-risk individuals. This helps cover the costs of the high-risk segment, which tends to use insurance benefits more. If the insurance company can't insure as many low-risk individuals, the premiums are even higher for those high-risk insureds.

Another significant way most insurance companies calculate your risk factor is by examining your credit score to arrive at an insurance score. They look at the following:

  • Outstanding debt
  • Monthly credit card account balance
  • Payment history

Having a bad credit score increases the likelihood that you'll be paying higher insurance premiums.

Auto Insurance Premiums

Each insurance company has its proprietary formula to determine insurance rates. Your auto policy premium will be highly personalized to your situation. Key factors to determine car insurance premiums include:

  • Your driving record
  • Claims history
  • Your age and demographics
  • Type of automobile covered
  • Your mileage
  • Credit history
  • Your amount of coverage
  • The deductible you select

For example, you will have higher car insurance premiums if you have a history of car accidents and speeding tickets. The more coverage, the higher your premium. A low deductible results in a higher rate. A higher deductible means a lower rate. You may obtain a lower premium by bundling multiple policies.

Health Insurance Premiums

Health insurance is critical for health care in the United States. Otherwise, out-of-pocket costs for most health procedures are more than most people can afford. Most people find that enrollment in a health plan is a necessity. It's much more manageable to pay premiums, cover deductible costs, and make copayments than to pay for health care services without insurance.

The Affordable Care Act prevents an insurer from using your medical history to deny coverage or impact your premiums. Health care law allows insurance companies to use a limited number of factors to set premiums. These include:

  • Age
  • Location
  • Tobacco use
  • Individual vs. family enrollment

State laws can provide even stronger protections regarding factors that can be used to charge consumers higher health insurance premiums.

Life Insurance Premiums

life insurance policy can protect your assets and provide for loved ones. A licensed life insurance agent can provide you with a life insurance quote.

Understanding what factors life insurance companies consider when determining premiums can help you control costs. Some factors that affect life insurance premiums include:

  • Type of policy
  • Coverage limits
  • Age
  • Sex
  • Life expectancy
  • Medical history
  • Smoking
  • Health
  • Occupation

The type of insurance selected profoundly impacts the cost of life insurance premiums. For example, a whole life insurance policy typically has a higher premium than a term life insurance policy.

Homeowners Insurance Premiums

Several factors affect the amount of money you'll pay for your home insurance. (Similar factors impact renters insurance.) These factors include:

  • Location
  • Credit history
  • Claims history
  • Home's age
  • Marital status
  • Deductible
  • Type of policy

For example, it's challenging to sell earthquake insurance to low-risk residents of Maine because they aren't likely to need it. Earthquake insurance premiums are even costlier for high-risk people living along an active fault line in California.

Insurance Premium Laws

Each state regulates the insurance industry operating within its borders. In some states, insurance companies must obtain prior approval for the premium rates they set. For example, many state insurance departments require prior approval for health insurance rates. On the other hand, approval is not typically required for life insurance rates.

States also set rules determining when and how an insurance company may cancel your policy. These laws generally allow your insurance company to cancel your policy if you fail to pay your insurance premiums. However, the notice the company must give you before terminating the policy varies widely.

For example, many states require just 10 days' notice before canceling an auto insurance policy for nonpayment. Others require a longer period before an insurer can cancel a car insurance policy for failing to pay auto insurance premiums.

Insurance Company Responsibilities

In exchange for the premium payments you make, the insurance company is obligated to abide by the terms of your insurance policy and provide the applicable benefits. This can include life insurance proceeds, paying for medical bills, defending yourself in a lawsuit, and many other benefits.

If an insurance company fails to pay on a legitimate claim or otherwise acts unfairly, they may be guilty of breaching your insurance contract or acting in bad faith. Additionally, using race or religion as factors for calculating your premiums is illegal. In some situations, it might be necessary to file a lawsuit against them or lodge a complaint with your state's insurance department.

Need Help With Your Insurance Premiums? Get Professional Help

The different types of insurance available to consumers continue to expand. With the complexities of life, you probably have several types of insurance coverage to protect your assets and provide for your loved ones. You pay your annual premium payments. Now, you expect the type of coverage you paid for. The last thing you need is to have issues with your insurance company.

Get help with your premium and other insurance issues by contacting an experienced local insurance attorney today.

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