What Are Insurance Premiums?

When prices for everything are increasing, you need to trim your budget down to the essentials. But while you may be able to cut back on nights out or subscriptions you don’t use, unfortunately, insurance is often a necessity. 

But the good news is you don’t have to pay more than you can afford to be protected.

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What Is an Insurance Premium?

An insurance premium is the amount you pay in exchange for having insurance coverage. It is often billed in monthly installments.

Insurance premiums may change from year to year or remain the same for a period of time. For example, a term life insurance premium is usually the same for its entire term, whereas homeowners insurance premiums may change from year to year.

How To Calculate Insurance Premiums

Many different factors can impact your insurance premium, including your age, where you live, the policy’s coverage amount, its deductible, and more. But there are less obvious factors that may affect your premium as well. 

For example, your credit score can influence your car insurance premium. People who have good credit are perceived as more responsible and therefore get lower rates. 

Filing a claim with your insurance company may also impact your premium. Some insurance companies may even elect not to renew your policy if you file several claims within a short time frame.

How are car insurance premiums calculated?

A car’s age, make, and model, as well as your state of residence and age, all impact car insurance premiums. Even gender can play a factor — young male drivers pay 14% more on average for insurance premiums than their female peers, according to The Zebra. 

Newer cars with more safety features may have lower insurance rates, and your personal safety record is another huge contributing factor. If you avoid accidents and speeding tickets, your rates will be lower. 

Also, having a lapse in coverage can cause your premiums to increase by about 10% on average, reports CNBC. In some cases, it may be less expensive to keep car insurance even if you don’t need it instead of letting it lapse. 

READ MORE: Here’s the Best Way to Shop for Car Insurance

How are life insurance premiums calculated?

There are two main types of life insurance: term and permanent. Permanent life insurance provides coverage for your entire life, whereas term life only lasts for a certain amount of time, generally between 10 and 30 years. 

Permanent life premiums are typically more expensive than term life premiums. 

Because life insurance companies only pay out when a policyholder passes away, premiums are lowest for those who purchase life insurance when they’re young. 

Since smoking reduces life expectancy, smokers may pay twice as much as nonsmokers for the same life insurance policy. Also, men typically pay more than women because their life expectancy is shorter.

READ MORE: Term vs. Permanent Life Insurance: Key Differences

How are homeowners insurance premiums calculated?

Many factors affect your homeowners insurance premiums, including your home’s value, the policy’s coverage amount, and the state where you live. For example, if you live in a state with frequent hurricanes or tornadoes, you may have much higher premiums than homeowners in other states.  

In 2023, homeowners in Florida saw a 42% increase in homeowners insurance premiums, reports NPR — making Florida the most expensive state to get coverage in the U.S. These high homeowners insurance premiums are attributed primarily to Florida’s high risk of severe tropical weather, including hurricanes.

How are renters insurance premiums calculated?

Renters insurance is impacted by where you live, the crime rates in your area, and if you purchase additional coverage for pricey items like electronics, musical instruments, jewelry, and more.

Renters insurance is among the least expensive types of insurance available because it doesn’t cover the actual building you live in. It typically only covers your belongings, temporary living expenses, and liability in case an accident happens on the property. 

How are health insurance premiums calculated?

Health insurance premium costs vary depending on your age, tobacco use, where you live, the type of coverage you have, and the number of people covered under your plan.

The lowest health insurance premiums are generally available for high-deductible plans, which can result in large out-of-pocket costs if you need surgery or frequent doctor visits. If you choose a plan with a lower deductible, your premium will likely be significantly higher. 

Also, many employers cover some or all of their employees’ health insurance premiums. But if you’re self-employed, then you’re responsible for covering 100% of the monthly cost.  

READ MORE: What Is a Health Savings Account and How Does It Work?

FAQs

Why does having a higher deductible lower your insurance premiums?

High deductibles reduce the amount that you must pay for covered expenses.

If the insurance company can limit the amount it pays for your covered expenses, it can increase its overall profit margins. Insurers therefore use low premiums to incentivize high deductibles.

Do you pay insurance premiums monthly or yearly?

Some types of insurance, such as auto insurance, can be paid monthly, semiannually, or annually. Other types, like health insurance, almost always require a monthly payment.

If you have a mortgage, homeowners insurance payments may be built into your monthly mortgage payment.   

Some insurance companies provide a discount if you pay annually or semiannually instead of monthly, with the discount ranging anywhere from 2% to 15% of the total premium amount. However, if it’s easier for you to budget a monthly payment, then that’s also an appropriate option.

What is the difference between the insurance rate and the premium? 

An insurance rate is set by an insurance company, and it’s based on your assessed risk level. The rate is multiplied by the amount of coverage you purchase, which results in your personal premium.

What happens if you miss a premium payment?

Many insurance companies give you a grace period if you accidentally miss a payment. The grace period typically lasts between 10 and 30 days, depending on the provider. As soon as you realize you have missed a payment, contact your insurance company and make a payment immediately. 

If you go past the grace period without making a payment, your policy may be canceled. You will then have to apply for a new policy, which may result in a higher premium than you had before.

TL;DR

Insurance premiums are how much you have to pay each month or year to your insurance company. The amount you’ll have to pay is calculated based on a few different factors, including how risky the insurer thinks you are.

Before you sign up for any type of insurance plan, make sure you shop around so you can find the lowest premium that still covers everything you need.

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