What is an Insurance Premium? How is it Calculated?

What is an Insurance Premium? How is it Calculated?PolicybazaarAverage Rating / 5 ( reviews)
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If you are holding an insurance plan, you might find yourself wondering how the insurance companies actually calculate the premiums that are charged to you. You are required to pay premiums for policies that provide cover for your health, along with your life, vehicle, home, and other valuables. The amount of this premium that you pay is based on a variety of factors such as age, amount of coverage needed, type of coverage required, personal information, among many other things.

Insurance Premium: What Is It?

When you are holding an insurance policy, the insurance company charges you money in return for the coverage that they provide. This cost of holding an insurance policy that provides coverage is known as insurance premium. Depending on the type of insurance plan, you might be required to pay insurance premiums on a monthly basis or maybe semi-annually. In some cases, the insurance provider might also require you to pay up the entire amount upfront before the policy’s coverage begins.

Most of the insurance providers offer numerous ways by which a policyholder can make the payment of their bills, including online payment modes, options for automatic payments, debit cards and credit cards, bank drafts, cashier’s cheques, and money orders, among others. You might also qualify for a good discount deal if you sign up for billing options that are paperless or if you make the payment of the entire amount at once instead of just making the minimum payments.

Insurance Premium: How Much Is It?

There is no fixed cost for insurance premiums. It is possible for you to have the exact same car as your neighbor and end up in a situation wherein you might be paying more (or even less) for the same insurance plan – even if you have the exact same amount of coverage. It actually pays to browse around and compare the different policies and compare the prices offered by the various insurance providers.

You will pay higher premiums for a better scope of coverage. For example, a term insurance plan has a higher sum assured will have a higher term insurance premium than a plan with a lower sum assured. Similarly, a health insurance plan with a higher deductible will have premiums higher than the premiums charged on a plan with a lower deductible.

However, this does not mean that you should go for the cheapest insurance policy available, just so that you can save on some funds. It is very important to consider your current scenario and the likelihood of your need arising to use the policy when you are opting for the insurance plan that suits your needs and requirements.

Insurance Premiums: How to Calculate?

There are various factors that are taken into consideration by the insurance companies when they calculate insurance premiums, some of them are:

  1. Your Age: Insurance providers look at a policyholder’s age because it helps them predict the probability involved in you needing to use the insurance coverage. When we talk about health insurance policies, the younger a policy seeker is, the lower is the likelihood of medical care, so the premiums charged on their policies are generally cheaper. Premiums on policies tend to increase as an individual matures and has a higher chance of requiring medical care. Similarly, teenage drivers, who still have a lesser experience, are considered to be more expensive to insure. Also, older aged drivers that tend to have more reflexes will also be more expensive to insure.
  2. Coverage Type: Generally, there are numerous options offered to a policy seeker when out in the market seeking to buy an insurance policy. The more comprehensive is the coverage opted for, the more will be the cost of insurance. For instance, if you are holding a car insurance plan that just covers third party liability, you will be charged lesser as opposed to a policy that comes with comprehensive cover along with other add ons.
  3. Coverage Amount: The lesser is the amount of coverage, the cheaper will be the premiums of the policy – regardless of what you are covering. If you are, for instance, opting for a term insurance policy, if you have a higher sum assured, the term insurance premium will be higher than in the case of a lower sum assured. Similarly, a higher value house will be more expensive to insure as compared to one with a lower value.
  4. Personal Information: Depending on the insurance type you are seeking, the insurance provider might study deeper about your claims history, credit history, driving record, marital status, gender, lifestyle, smoking habits, family’s medical history, job, hobbies, your residence, among other things.

Insurance Premium: How to Lower It?

Insurance companies are based on nothing but risk assessment. The higher the risk is involved in insuring, the higher are the premiums charged on the insurance. However, there are a few ways by which one can lower the insurance premiums.

One manner to lower the premiums is to form a bundle for your insurances. For instance, if you have your car, life, and home insurance plans with one insurance provider, you might qualify for a good discount.

There can be funds saved, of course, if you reduce your coverage. However, this is not always a good idea. It is important to be aware of your situation along with your likelihood of the policy usage before you make any such decision.

There are some other ways to lower your insurance premiums, which require a lot of commitment. For instance, many insurance providers charge smokers up to 50% extra as compared to those who do not smoke for health policies.

Similarly, you might qualify for cheaper car insurance, if you improve your credit score. Since people having a lower credit history are considered to be more likely to file a claim. 

The Final Say

Regardless of whether you opt for bundling your insurance policies or not, quit smoking, or even improve your credit score, it always and forever helps to shop around. This ensures that you find the best of insurance plans at a price within your budget.

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