Insurance Premium

Updated July 7, 2023

What is Insurance Premium?

An insurance premium is an amount a person pays to obtain an insurance coverage policy as necessary. For example, a business takes a ten-year insurance policy for its factory. The insured sum is $1,000,000. The company will have to pay a certain amount, for example, $50,000, every year for those ten years, which is decided based on the insured value.

The value depends on the type of insurance policy. It may include auto, health, home, life, or other objects. The individual/business entity should pay it monthly, half-yearly, annually, or in a lump sum, according to the agreed-upon premium frequency. In exchange for the payments, the insurance provider pledges to reimburse the policy buyers in unfortunate scenarios. Additionally, some premiums like health insurance are tax deductible/exemption by the IRS.

Key Highlights

• Insurance premiums are the amounts an individual or business must pay for insurance coverage
• Companies determine this value on parameters including the assured sum, coverage, and frequency of payment
• While the premium is the cost of buying insurance, the deductible is the sum the insured has to pay before the insurer provides the coverage
• Companies invest a majority of collected premiums to generate higher returns while they use the remainder to pay distressed policyholders.

What Determines an Insurance Premium?

Type of Insurance Cover

• The kind of coverage the applicant desires is a significant component that influences this value
• A policy with vast benefits is expensive, while a base plan or minimum coverage plan will be affordable
• For example, a comprehensive plan will cover all critical diseases, hospitalization, and other expenses for health insurance. Therefore, the premium is considerably more than the base health plan.

Applicant’s Personal Information

• The applicant’s insurance history, age, medical record, lifestyle choices, family health history, and work status all contribute to the charge
• Each insurer determines the amount independently based on variables.

Coverage Amount

• The sum guaranteed by the insurer can also influence this amount
• The higher the assured sum, the higher the premium.

Insurance Industry Competition

• Insurance firms wanting to pursue a particular market segment to attract new customers, As a strategy, temporarily adjust rates in the target area
• For example, an agency aiming to attract young individuals/families may change prices. Others interested in catering to retired or elderly clientele may strategize appropriately.

Types of Insurance Premiums

Life Insurance

• A life insurance policy safeguards the insured’s family and beneficiaries in case of death
• The insurance has a set term for which one must pay the premium
• Its amount may vary depending on age, lifestyle, and medical history.

Auto Insurance

• It protects from liabilities involving automobiles like cars, motors, etc
• The deciding variables are driving records, claims history, age, and more
• For example, a motorist with a clean driving record will pay a lower rate than one with accidents and violations.

Home Insurance

• Home or homeowners insurance intends to secure the policyholder against damage to their home or its liabilities
• The property’s size, value, coverage type, and location are the primary influencing factors.

How to Calculate Insurance Premiums? Examples

The formulas for the calculation are as follows,

Example 1:

John is 21 years old and has been smoking since he was a teenager. His father, Mr. Steve, is concerned about him and purchases a $500,000 health insurance policy to protect him financially. The insurance provider provides the following information about the medical plan,

Age	16 – 24 years	25 – 50 years	51 – 70 years	70 years and above
Base premium rate	2.01%	2.29%	3%	4.1%
Additional Premium for a specific disease	1.2%	1.5%	1.9%	2.3%
Extra Premium for smoking	0.65%	0.9%	1.2%	1.8%

Mr. Steve calculates the total premium as,

• Base premium = $500,000 * 2.01% = $10,050

Since John is an active smoker, the company levies an additional charge of 0.65% on the applicant.

• Extra premium levied = $500,000 * 0.65% = $3,250

Mr. Steve did not opt for an additional premium for any specific disease.

Therefore, the total premium payable = Base + Extra premium = $10,050 + $3,250 = $13,300.

Example 2:

Olivia purchases a new car and decides to buy vehicle insurance for it. The asset value of her car is $63,000. The rates by the company are as such,

Features	1000cc – 1500cc	1500cc and more
Private car	1.8%	2.8%
Third-party car	3.8%	5.8%

Olivia’s car is private and falls under the second category. She calculates the total premium as,

Insurance premium = Asset value * Percentage of coverage required as premium

= $63,000 * 2.8% = $1,764

Therefore, the total premium payable is $1,764

Insurance Premium vs. Deductibles

Premium	Deductible
It is the money payable per the agreement between the insurance provider and the policyholder. The policyholder pays the agreed-upon amount throughout the policy tenure	It is the out-of-pocket expenses that one must pay before insurance settles the rest of the claims
The policyholder is liable to pay the premium, even if they make no claims throughout the policy period	The insured has to pay this amount once they file a claim
Lower premiums imply higher deductibles. It is best for individuals who need no/ minimum claim possibility in a year.	Lower deductibles result in higher monthly premiums. It allows policyholders to save money during the treatment, as the insurance will pay most of the sum.

Insurance Premium Calculator

Use the following calculator for Term/Life Insurance Premiums calculations.

Use the following calculator for Other Insurance Premiums calculations.

Conclusion

Insurance is the umbrella protecting one’s interests in these unpredictable times. Its premium computation is a multi-layered procedure influenced by various factors. Therefore, before purchasing a policy, one should always consider all requisite characteristics to estimate the correct premium payable.

Frequently Asked Questions(FAQs)

Q1. What is the function of an insurance premium?
Answer: A policyholder must pay an insurance premium to obtain a policy and the preferred coverage. These payments are pooled together by the insurance company and used to settle any insurance claims. It also serves as an income for the insurance company.

Q2. What factors influence insurance premiums?
Answer: Depending on the plan, companies evaluate many criteria before determining the Premium. It comprises age, health history, lifestyle, coverage, deductibles, and more. For example, for a health policy, the company might assess the insured’s age, health conditions, pre-existing medical conditions, etc.

Q3. What happens if there are unpaid policy premiums?
Answer: When you get insurance, you must pay a yearly premium until the policy term expires. The company grants them a grace period when someone does not make the payment before the due date. However, failure to pay within the grace period results in a policy lapse; the policyholder cannot claim the policy anymore.

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