What is an Insurance Premium?

When it comes to any kind of insurance—from life insurance to auto insurance—one of the most important factors to take into consideration is the cost of a premium. That’s because it establishes how much you’ll pay for the coverage you receive. 

Here we explain the details of how premiums work, what the difference is between a premium and a deductible and what you can do to lower your rates. 

So, what is an insurance premium?

A premium is what an insurance company charges you for the policy you’ve chosen. No matter what type of insurance you’re purchasing, you’re required to pay a predetermined sum on a regular basis—even if you don’t end up using the insurance. Depending on the insurance and the billing plan you choose, you might make the premium payment monthly, quarterly or once a year. 

Insurance premium vs insurance deductible

Even though you have to pay a premium for insurance coverage, you may not be off the hook if a bill pops up. Most insurance plans also have deductibles. A deductible is the amount of money that you, the policyholder, have to kick in before the insurance company starts paying.

Let’s say your car insurance plan has a $150 monthly premium and a $1,000 deductible for damage to your car. You must pay the insurance company $150 every month in order to keep your coverage active. If you’re in an accident that results in $3,000 worth of damage to your car, you’d be responsible for paying $1,000 of that. The insurer would take care of the rest. After an auto insurance claim is filed, the deductible typically resets. With health insurance, your deductible resets at the beginning of each year you have the insurance, and you will have to pay out of pocket again. 

Not all types of insurance have a deductible (think: life insurance and disability insurance). Although rare, there are also zero-deductible health insurance policies, which charge very high monthly premiums. Your car insurance might also offer zero-deductible coverage in certain situations—say, if your car is stolen or damaged other than in an accident. 

How much does an insurance premium cost?

The cost is driven by how comprehensive your coverage is, where you live, and how much risk you pose. While the amount each person pays varies widely, these national averages can give you a ballpark: The average health insurance premium is $440 a month for individuals, car insurance premiums run about $1,009 per year or more, homeowner’s insurance is $1,211 annually on average, and life insurance costs about $126 a month. The national average cost of car insurance is just over $1,600 per year, according to recent data from NerdWallet. 

What goes into calculating an insurance premium?

There are several key factors that determine your rate:

The type of insurance coverage

The more comprehensive your policy, the higher your premium. For instance, homeowners who choose optional flood or earthquake insurance will spend more than if they’d stuck to the standard policy. Similarly, drivers fork over more to purchase optional collision coverage, in addition to mandatory liability coverage.

The amount you’re insured for also plays a role. All else equal, a $5,000,000 life insurance policy will have heftier premiums than a $500,000 policy; and a house worth $1,000,000 will incur a pricier premium than a $300,000 home.

Your insurance deductible

Typically, the higher your deductible is, the lower your premiums are, since you have to pay a greater portion of potential bills (say, if you have a health issue, car accident, or house fire). Although a high-deductible plan can save you money, it can also make your budget hard to predict because you never know when you might end up with a lot of expenses. 

Your personal information

Your age, where you live, your financial and physical health—they all have an impact on your premium. 

• Premiums are more expensive in certain locations than in others. Urban drivers have higher car insurance premiums compared to those who live in the suburbs or rural areas because cities experience greater incidence of vandalism, theft, and accidents. Homeowners might see higher fees if they live near the coast, in a neighborhood with a high crime rate, or far from a fire station. Healthcare premiums are costlier in places with fewer policies to choose from, and thus less competition.
  
  

• Age is another major contributor. Young drivers and people over 70 generally pay higher car insurance premiums. Older folks can be charged up to three times as much in healthcare premiums compared to young people. In addition, the older you are, the more you’ll pay for life insurance.
  
  

• Gender also plays a role, with women typically scoring better deals on auto insurance premiums (they have lower accident rates) and life insurance (they tend to live longer). Similarly, married couples pay less for car and home insurance, since they’re not as likely to file claims as single people.
  
  

• Your financial situation can also have an influence. Depending on the type of insurance you’re getting, a company might look at your insurance score, which is determined by calculating risk factors like your credit score and how many claims you have filed in the past. The lower your score, the more risk you present—and the higher your premiums will be.
  
  

• And don’t forget about your health. Smokers might pay up to 50 percent more in healthcare premiums than non-smokers. Life insurance policies will charge more if people have current or past health issues, a family history of illness, or unhealthy habits like smoking, heavy drinking, or drug use.
  
  

Other criteria that has an impact

Other factors including your occupation, driving record and hobbies can affect life insurance premiums. House insurance companies might upcharge policyholders who have potential hazards—like a pool, trampoline, tree house, wood-burning stove, or dangerous breed of dog. The kind of car you own and how many miles you drive per year affects car insurance fees.

Do all types of insurance charge an insurance premium?

The short answer: Pretty much—with the exception of Medicare Advantage, a healthcare plan that may charge $0 in premiums.

Why do insurance premiums increase?

There are a number of reasons why a company might hike up your premiums. Here are a few of the most common:

You expand your coverage

If you add another driver or vehicle to your car insurance policy, or an additional family member to your healthcare plan, your rates will rise. Home renovations or a move can augment your premiums to account for the increased value of your house. (On the flip side, your home insurance premiums might also jump if you need to make repairs or upgrades.) 

Your insurance score drops

Every time you cash in on your home or auto insurance (think: a break-in, a fender bender), your premiums subsequently rise because you’re considered a greater risk. Even if a neighbor files claims for weather- or crime-related damage, your prices can tangentially shoot up, too. A dip in your credit score can also lead to higher premiums.

Outside costs

Are construction expenses in your area soaring? Don’t be surprised if your home insurance premiums also get steeper. Has your insurance company’s bottom line taken a hit? Policyholders will absorb some of the cost. For example, a major hurricane one year can trigger higher premiums for all homeowners the next, while the rise in chronic illness in the U.S. increases healthcare premiums for everyone. 

How do I get the lowest insurance premium?

If you think you’re paying too much, it’s worth calling up your insurance representative and asking how you can reduce your premium fees. Some companies give long-term customers a break or have special promotions. It also pays (literally) to do your homework. Get quotes from at least three different providers and ask family and friends for recommendations. 

Making changes to your policy can also slash your costs. Opt for a higher deductible in exchange for lower premiums. Or consider bundling—you might nab a discount for purchasing both car and home insurance from the same company. 

Finally, you can make lifestyle shifts to lower your premium, like improving your credit score or quitting smoking. If you make a positive change, tell your insurer and request a better rate.