What Is an Insurance Premium?

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  • An insurance premium generally refers to your financial contribution. Find out more details about what an insurance premium is in this article from HelpAdvisor.

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. And 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 to. These levels are set by individual state insurance regulators.