When people are first shopping for insurance, they come across a puzzling term — insurance premium. And that term often leads people to ask “what is a premium,” and “what does insurance premium mean?”
While premium is not a term we often use in everyday language — at least not in terms of something’s cost — think of an insurance premium as the price tag for your protection.
Now don’t be confused. Not only “premium insurance plans” come with a premium. That is just a name for the cost of insurance. In this case, premium has nothing to do with quality.
What is an insurance premium?
Keep reading if you are still wondering what are insurance premiums and what is a premium in insurance. While it seems simple at first, understanding a premium insurance definition is crucial for understanding just what you are buying and trying to protect.
Every type of insurance has a premium, whether that is health insurance, auto insurance, homeowner’s insurance — really any insurance at all.
In exchange for the insurance premiums, the insurance company agrees to protect you from specific bad things happening. For example, in exchange for your car insurance premium, the insurer promises to pay you in the event of an accident.
How do they decide how much to charge?
Insurance companies know risk, and in the end, much like a casino always wins more than it pays out, insurance premiums are written by people called “actuaries” so that the insurance company makes more money than it pays out on average and over time.
If some assumption turns out to be inaccurate, and you end up costing more money to insure than your insurance company predicted, then your insurance premium is going to go up the next time you renew your contract.
Each insurance company uses different information about you and your situation to help them predict how much of a risk you represent. Then, based on that predicted risk, they set the insurance premium for the policy.
Some common factors that go into setting an insurance premium include what precisely you are trying to protect as well as historical information that the insurer believes will help predict future risk.
Obviously a $1 million mansion will cost more to insure than a $100,000 apartment because if each burned down, the insurer would have to pay more to replace the mansion.
And a driver with three DUIs will cost more to insure than someone with 20 years behind the wheel without a single accident or speeding ticket — because if someone has shown a record of recklessness, why would the insurer think that in the future, that driver’s actions will change?
Other factors effecting your car insurance monthly cost
Some other common factors may not be as obvious, though. For example, in many cases insurers use credit scores as a predictor for how much risk you represent. The thinking goes something like that if you are fastidious with your finances, that may reflect a bigger trend that translates to being careful and better driving, for example. But if you are fast and loose with your finances, you may be more likely to drive faster and looser, the thinking goes.
Some demographic information can be used to set how much you pay for your car insurance per month, while some reasons to change your premium are strictly off limits.
For example, your age, gender, address and marital status are all fair game when it comes to premium pricing. But setting your premium based on your race or religion is illegal.
How often can you pay?
In many cases, insurers allow you to break up your premium over the span of the insurance policy. For example, you can either pay for the entire year up front, or you could pay for it in quarterly installments, or monthly. Some insurers even allow you to pay in two-week increments.
As a rule, the more payments you break your insurance premium into, the more you will pay in transaction costs or convenience fees.
Paying all at once is almost always the least expensive way to go.
How can you keep your premium low?
Some things are out of your control when it comes to pricing your insurance premium. For example, a 17-year-old has little control over her age.
But, establishing good driving records and paying your bills on time are certainly things you can do to drive down your car insurance premium.
Be especially vigilant about paying your insurance on time. Missing an insurance premium payment will lead to your insurer cancelling your policy, so make sure to stay on top of those payments, however often you choose to break them up.
But saving money on your insurance premium doesn’t stop there. Shopping around with an online tool will give you assurance that you are paying the lowest insurance premium possible. You can also adjust your coverage limits. But be careful with that. Saving a few bucks a month is hardly worth opening yourself up to a big liability if you cause a crash down the road.
Health insurance typically can only be shopped for at one predetermined time of the year, called open enrollment. Other types of insurance don’t have that restriction. You can shop around for your homeowner’s, life insurance or auto insurance any time of the year, and really, as often as you like.
And as you shop, do so with a little more confidence now that you understand the premium definition insurance and what is insurance premium.