What Is an Insurance Premium?

Christian Worstell
In this article...
  • An insurance premium generally refers to your financial contribution. Find out more details about what an insurance premium is, how you typically can pay and more.

An insurance premium is how much you pay out of pocket each month to be enrolled in your specific insurance policy. Insurance premiums are paid for all types of insurance, including health, auto, home and life insurance.

An insurance premium serves as income for an insurance company. In the case of health insurance, you pay monthly insurance premiums to be enrolled in your policy. When you get sick or have to go to the doctor, the insurance company pays a portion of your health care costs because you pay a premium each month and have certain benefits as a result.

If you fail to pay an insurance premium, it can result in the cancellation of your policy.

Insurance Premium Options

When enrolling in an insurance policy, a policyholder has different options to choose from when it comes to premiums. In general, a higher premium can include more coverage, and paying a lower premium may include less coverage.

Sometimes, insurance premiums can be paid in installments, such as monthly, or sometimes, they may be paid in full for a period of six months or a year.

Insurance premium costs depend on several factors, including:

  • Your age
  • Location
  • Past claims you may have filed
  • Type of coverage, such as comprehensive or liability coverage
  • The type of policy the premium pays for, such as health insurance, auto, home or life insurance

Risk Assessment

While the process for determining premium amounts varies widely according to company, insurance type and other factors, in general, the insurance company assesses your risk in determining your insurance premium amount. 

Health Insurance

In the case of health insurance, companies can no longer charge you more for premiums or deny you coverage based on preexisting conditions thanks to the Affordable Care Act (ACA). But they can base your premium on how old you are, where you live and what the coverage includes.

For example, you might pay more in premiums each month but have lower office visit copays while someone else who pays less in premiums may have to pay a bit more in copays for prescriptions or an office visit.

Auto Insurance

For auto insurance premiums, the amount you pay may be based on the age, make and model of the car you drive, where you live, your driving record and how often you use your car, among other factors.

Sometimes, auto insurance premiums are paid monthly, and sometimes, they are paid in six-month or annual installments.

Life Insurance

For life insurance premiums, age is a big factor when determining the monthly premium — generally, the younger you are when you begin coverage, the lower your premium is. And as you get older, that premium may steadily increase, but it depends on the type of policy you have.

Overall health is another big risk factor, and life insurance companies perform a comprehensive health assessment before deciding on your premium amounts.

How Insurance Premiums Are Used

Insurance premiums are used in a variety of ways — most commonly to cover liabilities with policies the insurance company underwrites. Premiums may also be invested to generate greater returns.

Even though insurance companies can invest some of that money, they are required to maintain appropriate levels of liquid assets at all times to ensure they can pay out claims when they need. These levels are set by individual state insurance regulators.

Christian Worstell
About the Author

Christian Worstell is a senior Medicare and health insurance writer with HelpAdivsor.com. He is also a licensed health insurance agent. Christian is well-known in the insurance industry for the thousands of educational articles he’s written, helping Americans better understand their health insurance and Medicare coverage.

Christian’s work as a Medicare expert has appeared in several top-tier and trade news outlets including Forbes, MarketWatch, WebMD and Yahoo! Finance.

While at HelpAdvisor, Christian has written hundreds of articles that teach Medicare beneficiaries the best practices for navigating Medicare. His articles are read by thousands of older Americans each month. By better understanding their health care coverage, readers may hopefully learn how to limit their out-of-pocket Medicare spending and access quality medical care.

Christian’s passion for his role stems from his desire to make a difference in the senior community. He strongly believes that the more beneficiaries know about their Medicare coverage, the better their overall health and wellness is as a result.

A current resident of Raleigh, Christian is a graduate of Shippensburg University with a bachelor’s degree in journalism. You can find Christian’s most recent articles in our blog.

If you’re a member of the media looking to connect with Christian, please don’t hesitate to email our public relations team at Mike@MyHelpAdvisor.com.

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