What is an insurance premium? I know you are curious to know about it, then keep reading this article.
Insurance is a type of financial contract between two parties to guide against financial losses, commonly due to damage.
Moreover, insurance guides the individual or business from any financial burden of loss, by instead paying regular insurance premiums in exchange for limiting their liability in the event of a loss or damage that can be costly.
However, the policyholder agrees to pay insurance premiums so that the insurance company agrees to pay for the specific loss or damage in circumstances that it agrees to and states in the contract.
In this article, we will look at how the insurance premium works, the types and the overview.
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What Is An Insurance Premium
Table of Contents
The insurance premium is the amount of money an individual pays for an insurance policy. Moreover, they are paid for policies that cover healthcare, home, auto and life insurance.
Once earned, the premium is income for the insurance company. It also represents the liability as the insurer gives cover claims being made against the policy.
However, failure to pay the premium on the individual can result in the cancellation of the policy.
How An Insurance Premium Works
Insurance costs money, but one term that can be new when you first start buying insurance is “premium.”
Moreover, the premium is the amount that is being said by the person for policies that gives home, auto, health care, or life insurance coverage.
For instant, when you pay $212 per month to keep your car insured, the yearly insurance premium will be $2,544. If you purchased the six-month policy, your insurance premium would be $1,272.
Insurance premiums usually have the base calculation. Then, based on your personal information and location you can have discounts that are added to the base premium that will reduce the cost.
Moreover, to have the preferred rates or more competitive or cheap insurance premiums, additional information is used.
What Factors Determine An Insurance Premium?
The insurance premium is usually determined by four key factors.
1. Type of Coverage
Insurance companies give different options when you want to get an insurance policy. The more coverage you get, or the more comprehensive coverage you choose, the high your insurance premium may be.
For example, if you look at the premium for home insurance, if you get an open perils or all-risk coverage home insurance policy that will be more expensive than a named perils home insurance policy that only covers the basics.
2. Amount of Coverage and Your Insurance Premium Cost
If you are purchasing life insurance, health insurance, car insurance or other insurance, you will always pay a high premium for high amounts of coverage.
This can work in two ways. The first way is pretty straightforward, and the second way is a little complicated but a good way to save on your insurance premiums.
3. Personal Information of The Insurance Policy Applicant
The insurance history, where you live and other factors of your life are used as part of the calculation to determine the insurance premium that will be changed. Every insurance company will be used for diverse rating criteria.
Some companies use insurance scores that will be determined by various personal factors, from the credit rate to car accident frequency or personal claims history and even occupation.
These factors also translate into discounts on the insurance policy premium. The life insurance, and other risk factors specific to the person being insured that still be used well like age and health conditions.
4. Competition In The Insurance Industry And Target Area
When an insurance company decides that it wants to aggressively pursue the market segment, it will deviate rates to attract new business.
However, it is an interesting facet of insurance premiums because will drastically alter them temporarily, for a more permanent basis if the insurance company has success and get good results in the market.
READ MORE: Insurance premium: What is it and how does it work?
How Premiums Are Calculated
Insurance premiums can increase after the policy period ends. The insurer may increase the premium for the claims made during the previous period for the risk associated with offering a particular type of insurance increases or the cost of providing cover increases.
However, companies generally employ actuaries to determine the risk levels and premium prices for the given insurance policy.
The emergence of sophisticated algorithms and artificial intelligence is fundamentally changing the insurance prices sold.
There is an active debate among those that say algorithms will replace human actuaries in the future and those who contend the increased use of algorithms will require great participation of human actuaries and send the profession to the next level.
Insurers make use of the premium paid to them by their customers and policyholders to cover liabilities associated with the policies they underwrite.
Moreover, it can invest in the premium to generate high returns. It can offset some costs to provide insurance coverage and help an insurer keep its prices competitive.
While insurance companies can invest in assets with varying levels of liquidity and returns, they are required to maintain a certain level of liquidity at all times.
READ MORE: WHAT IS LIFE INSURANCE WITH A RETURN-OF-PREMIUM CLAUSE?
Conclusion
An insurance premium is the money an individual pays for the insurance policy. Insurance premiums are paid for policies to cover home, auto, healthcare and life insurance.
