An insurance premium is an amount you pay to an insurance provider in exchange for coverage. The premium portion of a policy is significant because it must be paid in order to keep coverage in force. The policy may lapse if the premium is late or unpaid, resulting in unexpected costs and worries.
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How Do Insurance Premiums Work?
When you purchase an insurance policy, regardless of its type, you must pay a premium to secure and keep the policy. This premium includes the calculated cost the insurance provider provides and any taxes, surcharges, or fees. Besides the premium, you may be responsible for paying expenses such as deductibles, copays, and coinsurance.
Depending on the type of policy, there may be several ways to pay your premiums, such as the following:
- Regular premiums: Regular premiums are made on a regular, predetermined basis — such as monthly, quarterly, semi-annually, and annually. This type of premium is offered for almost all insurance policy types.
- Single premiums: Single premiums refer to a single payment made at the start of the policy that will pay the policy in total, and no further premiums will be due. Life insurance policies may offer an option for a single premium.
- Flexible premiums: Flexible premiums are payments made irregularly that may vary in amount and frequency. Although they are flexible, premium payments still are required to keep the policy in force. This may be an option on some life insurance policies.
Types of Insurance Premiums
All types of insurance have a premium associated with the policy. However, how the premium is calculated and how it works will vary depending on the type of policy.
Health Insurance
Since the enactment of the Affordable Healthcare Act (ACA), health insurance companies cannot use certain factors such as your health, previous medical history, or gender to calculate your premium. However, the following factors can be used to determine your cost:
- Age: Premiums can rise as you get older due to increased risk of health issues.
- Location: Where you live and your access to medical providers can affect your premium.
- Tobacco usage: Insurance companies can charge tobacco users up to 50% more than nontobacco users.
- Type of plan: A family plan will be more expensive than a single-person plan.
- Type of coverage: The coverage you select will significantly affect your premium. For example, a plan with a higher out-of-pocket maximum would offer a more reduced premium than one with a lower out-of-pocket maximum.
If you have insurance through an employer, the employer may pay part of the premium. In 2022, the average annual cost of an employer-sponsored health plan looked like this:
Annual Cost | Employer Coverage | Monthly Premium | |
|---|---|---|---|
Single Plan | $7,911 | $1,327 | $110.58 |
Family Plan | $22,463 | $6,106 | $508.83 |
Of course, these costs vary by many factors — but an average employer-sponsored health plan costs around these amounts.
Auto Insurance
When it comes to auto insurance, there are many factors that can determine your premium, such as:
- Age: Younger drivers are more expensive to insure than older, more experienced drivers.
- Gender: Generally, males are more expensive to insure than females.
- Location: Where you live and the frequency of accidents in your area will affect your premium.
- Marital status: Generally, married couples may pay a lower cost than single drivers.
- Vehicle: Your vehicle’s age, type, and value can affect how much you pay. A newer, more costly vehicle may have a higher premium than an older vehicle. Also, a sports car may be more expensive than a minivan.
- Driving history: If you have frequent claims and tickets — or are a new driver — you may consider a higher premium for your auto insurance coverage.
- Mileage: How many miles you drive annually can affect your premium. There may be discounts available for those who only drive occasionally.
- Credit: Your credit score may raise or lower your cost; the better your credit, the lower your premium.
- Coverage: The coverage you select, such as your liability limits and deductibles, will greatly affect your cost.
In the United States, the average cost of an auto policy per year is $1,553. Most insurers will allow you to pay this in regular payments, either monthly, quarterly, or semi-annually. If you elected to pay your auto insurance premium every month, the average cost would be $129.42 a month.
Homeowners Insurance
You pay a homeowner’s premium to help protect your home and belongings in case of a covered loss. The following factors can affect your premium:
- Location: Where you live is one of the most significant factors that affect your cost. Some areas may be prone to natural disasters and risk factors.
- House: Your home’s size, type, and quality help determine your premium.
- Coverage: Your coverage, such as your replacement cost and deductibles, can affect what you pay.
- Claim history: If you have a history of claims, you may look at a higher premium.
- Credit: Your overall credit score can affect your premium; the better your credit, the lower your premium.
- Additional risks: If you have additional risks, such as a swimming pool or business on the property, you may see an increase in your premium.
The average cost of a homeowner’s policy is $1,428 per year. This may be paid in one yearly payment or broken down into regular payments. Most insurance companies will allow you to make regular payments annually, semi-annually, quarterly, or monthly.
Renters Insurance
A renters insurance policy is for those who rent their home and covers their belongings in the event of a coverage loss. The premium can be affected by the following:
- Location: Like a homeowner’s policy, where you live and the frequency of claims in the area can affect what you pay.
- Coverage: The amount of coverage you select and your deductible can raise or lower your cost.
- Credit: Just like on other types of policies, your credit can affect your premium.
- Claim history: Claims on your record could lead to a higher premium.
- Other risks: If you have a business on the premises or a dog, this could lead to a higher insurance cost.
The average yearly premium for a renters policy varies significantly by state, between $115-$252. It is much more affordable than a homeowner’s policy because a renter’s policy does not cover your dwelling. If needed, the insurance company will usually allow regular annual, semi-annual, quarterly, and monthly payments.
Life Insurance
When it comes to calculating the cost of your life insurance policy, companies may use the following factors:
- Age: The younger you are when you purchase a life insurance policy, the lower the cost.
- Gender: Unlike health insurance, life insurance companies can use gender to calculate a cost. Premiums for females are usually lower than for males.
- Health: Your overall health condition, including pre-existing conditions, height, weight, current medications, and family history, can all affect your premium. Generally, the healthier you are, the better your premium will be.
- Type of policy: There are many types of life insurance, and you can expect to pay more for a permanent policy than a term policy.
- Amount of coverage: The amount of coverage you purchase will significantly affect your cost. For example, a $25,000 policy would have a lower premium than a $500,000 policy of the same type.
- Lifestyle: Your hobbies, including any dangerous activities such as skydiving or mountain climbing, can affect your cost.
In the United States, the average consumer pays $48 per month for life insurance. Companies usually offer different payment plans, such as annual, semi-annual, quarterly, and monthly. Depending on the type of policy, you may look at a single premium (usually available on whole life policies) or flexible premiums (usually available on universal life policies).
How Much Do Premiums Cost?
When you look to purchase an insurance policy, the premium you pay will vary greatly depending on the type of policy and other factors. However, getting an idea of what you can expect is important.
Average Monthly Premium | |
|---|---|
Health Insurance (employer-sponsored) | Single – $110.58 Family – $508.00 |
Auto Insurance | $129.42 |
Homeowners Insurance | $119.00 |
Renters Insurance | $13.00 |
Life Insurance | $48.00 |
How to Navigate Insurance Premiums
When navigating your insurance premiums, there are ways to look for the best premium. Use the following steps to help get the best deal:
- Shop around. Look around for the best prices. You want to consider the premium, what coverage you need, and the company. Comparing an apples-to-apples quote can help you look for breaks in costs.
- Bundle policies. Many insurance companies may offer discounts if you bundle your policies together. Ask your agent or representative if this is something that would help you.
- Periodically review your insurance needs. Make sure that you review your policies at least once per year. This can help eliminate unnecessary coverage and reduce your price.
- Consider raising your deductible. Most insurance policies say the higher your deductible, the lower your premiums. Consider raising your deductible to help offset some of your costs.
- Ask about discounts. For many types of policies, discounts may be available to you that you are not currently getting. Talk to your agent or representative to see what discounts you are eligible for.
- Seek professional advice. Sometimes, it may be best to seek the advice of a professional to review your insurance policies. They can offer a thorough review and help reduce your overall premiums.
All in All
All insurance policies have a premium. Depending on the type of policy, different factors contribute to the overall cost. Knowing the factors ahead of time may allow you to not only have an understanding of how they work but also to look for ways to reduce your premiums.
For example, knowing that good credit can help reduce premiums on a homeowner’s insurance policy, you may look into your credit before getting a policy to ensure that you are in good standing.
Regardless of the type of insurance policy, knowing the ins and outs of the premiums will help put you into a better financial situation.