Insurance Premium

An insurance premium is the amount of money an insurance company charges for coverage for a certain period of time (monthly payments are most common). An insurance premium will vary wildly depending on the insurance company, the customer, and the type or quantity of insurance that is purchased. We'll explore insurance premiums and the different parts of an insurance policy that can affect how large or how small a premium will be.

Insurance Premiums and Quotes
Insurance companies calculate a premium by deciding how much of a risk your specific policy incurs, and how much they will have to charge to make a profit by protecting you against that risk. This process is a quotation process, whereby you provide the information needed and the statisticians working for the company decide the risk and reward of accepting you as a customer. (As a side note, in the insurance industry, statisticians are called actuaries, and the career is one of the fastest growing in the world!)

Rarely are new customers ever turned away for coverage, but they are very often priced away. For example, someone who had 4 heart attacks in the past two years and is 65 years old will have health insurance premiums several times larger than someone who is 20 years old and in perfect health. In this case, the insurance company did not turn down the 65 year old, but it would likely come back with an insurance premium so sky-high the person wouldn't be able to pay for it. The health insurance company, based on its risk models, would determine that insuring this specific person would be highly expensive and risky, and would have to charge a high monthly premium to make a profit.

One common example for demonstrating the difference between two quotes or insurance premiums is the difference in life insurance quotes for smokers and nonsmokers. Since tobacco smokers have, on average, a greater chance of death compared to nonsmokers, they are given higher premiums. Nonsmokers, on average, will pay significantly smaller life insurance premiums than smokers.

Premiums and Coverage

The amount and type of insurance coverage is vital to how expensive or inexpensive and insurance premium will be. More coverage will typically result in a higher premium, while less coverage will result in a lower insurance premium.

This is best showcased on home insurance, where insuring a $1 million home brings about larger insurance premiums than insuring a $100,000 home. However, if each home were insured only up to $50,000 in coverage, the premiums to insure each home would be nearly equal, since the risk and payout are essentially the same, regardless of the full market price.

Deductibles, too, affect total monthly premiums. A deductible is an amount that someone must pay for something before insurance pays the remainder. Most people know of deductibles through their car insurance company. If you were to have a $500 deductible and get into an accident that created $5000 in damages, you would have to put up $500 and the insurance company would pay the remaining $4500. A higher deductible will help lower your insurance premiums, while a lower deductible will create higher insurance premiums.

Round It Up
While most people come to the conclusion that an insurance premium is just a pesky monthly bill, it is actually a very important product, and something few people appreciate until they have to use it. Insuring the most valuable things in your life—health, home, car, family—will allow you the peace of mind for a very small monthly insurance premium. The best insurance is often reassurance, regardless of the premium.

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