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What is a Premium?

A premium is the amount of money paid to an insurance provider on a periodic basis by an individual or a business. Simply put, you could think of the "insurance premium" as the "insurance price."

Policies covering healthcare, auto, home, and life insurance all require premiums. For the insurance company, the premium is considered the source of income and a liability requiring the company to provide coverage for relevant claims. If the individual or the business fails to pay the premium, the policy may be terminated.

Key Takeaways

  • An insurance premium is the amount of money an individual or business pays for an insurance policy.
  • Premiums are paid for healthcare, auto, home, and life insurance policies.
  • According to the policy, premiums are usually paid quarterly, monthly, or semi-annually.
  • Actuaries usually determine insurance premiums, although the use of artificial intelligence has become increasingly popular in the field.

Who Calculates Insurance Premiums?

Insurance companies generally hire actuaries to determine premiums for certain policies by balancing risk factors and experiences. Based on the history data they gather on disaster and claim costs, actuaries strategically develop guidelines and projections as a way to help insurance companies set their premiums. However, as modern technology evolves, insurers are beginning to use artificial intelligence and complex algorithms to calculate premiums. It is even believed that some of these technologies will eventually replace actuaries entirely in the future.

Factors that Determine Premiums

Insurance premiums are influenced by several factors, such as:

  • The Insured’s Personal Information: In calculating your insurance premium, your insurer may consider your insurance history, location, age, and occupation. Aside from examining a variety of personal factors, insurance companies often take one’s insurance score into account. Various personal factors contribute to one’s insurance score, such as claims filed and credit card ratings.
  • Type of Coverage: Depending on the type of coverage, the premium amount will differ. For example, when it comes to home insurance, one can opt for all-risk coverage that covers any event that is not explicitly excluded, instead of named perils that only cover a limited set of events. Since all-risk coverage provides more protection, it will typically result in a higher premium.
  • Amount of Coverage: In addition to the above factor, higher coverage amounts tend to result in higher premiums. For instance, imagine that your house is worth $1,000,000 while your friend’s house is worth $750,000. Your premium will be more expensive because you will have to pay a higher premium if you want to guarantee more dollar value. In addition, lower deductibles typically result in higher premiums. As a result, a policy with a higher deductible will in turn help you save money on premiums.
  • Industry Competition: In hopes of attracting new customers, insurance companies may choose to periodically reduce premiums in relation to the current status of the market. Although this factor usually results in temporary changes in rates, if the company sees success with these prices, it can make a permanent change to premiums.

Bottom Line

Various factors play a role in determining policy premiums, and understanding these considerations can help you find the best insurance policy with a premium that suits your budget and needs. Be sure to consult an insurance professional, such as an experienced malpractice attorney, before purchasing an insurance premium.

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