Consumer Reports, she is an expert in credit and debt, retirement planning, home ownership, employment issues, and insurance. She is a graduate of Bryn Mawr College (A.B., history) and has an MFA in creative nonfiction from Bennington College.” data-inline-tooltip=”true”>Julia Kagan
Julia Kagan has written about personal finance for more than 25 years and for jonathanlewisforcongress.com since 2014. The former editor of Consumer Reports, she is an expert in credit and debt, retirement planning, home ownership, employment issues, and insurance. She is a graduate of Bryn Mawr College (A.B., history) and has an MFA in creative nonfiction from Bennington College.
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Samantha Silberstein is a Certified Financial Planner, FINRA Series 7 and 63 licensed holder, State of California Life, Accident, and Health Insurance Licensed Agent, and CFA. She spends her days working with hundreds of employees from non-profit and higher education organizations on their personal financial plans.
What Is Insurance Premium?
An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance. Once earned, the premium isincome forthe insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium on the individual or the business may result in the cancellation of the policy.
An insurance premium is the amount of money an individual or business must pay for an insurance policy.Insurance premiums are paid for policies that cover healthcare, auto, home, and life insurance.Failure to pay the premium on the part of the individual or the business may result in the cancellation of the policy and a loss of coverage.Some premiums are paid quarterly, monthly, or semi-annually depending on the policy.Shopping around for insurance may help you find affordable premiums.
How an Insurance Premium Works
When you sign up for an insurance policy, your insurer will charge you a premium. This is the amount you pay for the policy. Policyholders maychoose fromseveral options forpaying theirinsurance premiums. Some insurers allow the policyholder to pay the insurance premium in installments—monthly or semi-annually—while others may require an upfront payment in full before any coverage starts.
There may be additional charges payable to the insurer on top of the premium, including taxes or services fees.
For example, in an auto insurance policy, the likelihood of a claim being made against a teenage driver living in an urban area may be higher than a teenage driverin a suburban area. In general, the greater the risk associated, the more expensive the insurance policy (and thus, the insurance premiums).
In the case of a life insurance policy, the age at which you begin coverage will determine your premium amount, along with other risk factors (such as your current health). The younger you are, the lower your premiums will generally be. Conversely, the older you get, the more you pay in premiums to your insurance company.
How Premiums Are Calculated
Insurance premiums may increase after the policy period ends. The insurer may increase the premium for claims made during the previous period if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.
Insurance companies generally employactuariesto determine risk levels and premium prices fora given insurance policy. The emergence of sophisticated algorithms and artificial intelligenceis fundamentally changing how insurance is priced and sold. There is an active debate between those who say algorithms will replace human actuaries in the future and those who contend the increasing use of algorithms will require greater participation of human actuaries and send the profession to a “next level.”
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. They may alsoinvest in the premium to generate higher returns. This can offset some costs of providing insurance coverage and help an insurer keep its prices competitive.
While insurance companies may invest in assets with varying levels of liquidity and returns, they are required to maintain a certain level of liquidity at all times. State insurance regulators setthe number of liquid assets necessaryto ensureinsurerscanpay claims.
Most consumers find shopping around to be the best way to find the cheapest insurance premiums. You may choose to shop around on your own with individual insurance companies. And if you are looking for quotes, it”s fairly easy to do this by yourself online.
For example, the Affordable Care Act (ACA) allows uninsured consumers to shop around for health insurance policies on the marketplace. Upon logging in, the site requires some basic information such as your name, date of birth, address, and income, along with the personal information of anyone else in your household. You can choose from several options available based on your home state—each with different premiums, deductibles, and copays—the policy coverage changes based on the amount you pay.
The other option is to try going through an insurance agent or broker. They tend to work with a number of different companies and can try to get you the best quote. Many brokers can connect you to life, auto, home, and health insurance policies. However, it”s important to remember that some of these brokers may be motivated by commissions.
Insurers use the premiums paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite. Some insurers invest in the premium to generate higher returns. By doing so, the companies can offset some costs of providing insurance coverage and help an insurer keep its prices competitive within the market.
Insurance premiums depend on a variety of factors including the type of coverage being purchased by the policyholder, the age of the policyholder, where the policyholder lives, the claim history of the policyholder, and moral hazard and adverse selection. Insurance premiums may increase after the policy period ends, or if the risk associated with offering a particular type of insurance increases. It may also change if the amount of coverage changes.
An actuary assesses and manages the risks of financial investments, insurance policies, and other potentially risky ventures. Actuaries assess particular situations financial risks, primarily using probability, economic theory, and computer science. Most actuaries work at insurance companies, where their risk-management capabilities are particularly applicable in determining risk levels and premium prices for a given insurance policy.