Insurance Premium Basics

An insurance premium is the price you pay an insurance company for a policy. Premiums are used in health, auto, home and life insurance policies. Failure to pay the premium can result in the cancellation of your policy. In this article, we will go over the basics of how an insurance premium works.

How It Works

Premiums are paid either monthly, semi-annually, or as an upfront lump sum. The price of your premium will depend on several factors. These include the type of coverage, your age, the area you live in, if you have filed any claims in the past, as well as moral hazard and adverse selection.

How They Calculate and Use Premiums

Actuaries, algorithms, and artificial intelligence are used to determine your risk level and premium prices. These are based on your age, coverage, claim history, and the area you live in. When your policy period ends your premiums may increase. This can happen due to a risk increase in the policy period or an increase in the cost of providing coverage. The insurance companies use your premiums to cover the expenses associated with the policies they underwrite. They also may invest your premiums to generate returns that help to keep their costs competitive.

Purchasing an Insurance Policy

When you are purchasing an insurance policy it is important that you shop around for premiums. You can either do this online or with an insurance agent.

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