- An insurance premium is the amount you pay each month to hold an insurance policy.
- Insurance helps you manage your risk of loss — for your car, home, medical expenses, and more — as a result of liability, disability, or death.
- Don’t miss securing your lifestyle or finances by overlooking insurance or missing your insurance premium payments.
“Ugh,” you think. “Another monthly health insurance payment?” Coupled with your auto insurance, renters insurance (or homeowners insurance), and life insurance, it feels like you’re constantly making insurance payments. “What’s the point?” you wonder.
Although it might feel like monthly insurance payments are pointless, they’re actually incredibly important. They protect you financially in the event that something unexpected happens, like a job loss, medical emergency, or car accident.
It’s important to know what your insurance premium is, what factors affect your premium, and how much insurance coverage you should consider buying. Read on for an overview on this and more.
What Are Insurance Premiums?
An insurance premium is the amount you pay an insurance company each month (or year, in some cases) to hold a policy with them. For example, if you pay $85 per month toward health insurance, that’s your insurance premium.
Insurance premiums are typically paid on a monthly, bi-monthly, bi-annual, or annual basis.
Your insurance premium pays for your coverage against loss up to a certain limit. For example, let’s say you pay $1,500 per year toward auto insurance. That amount would protect you up to a certain amount of damage, say $50,000 of bodily injury per occupant and $50,000 of property damage. In the event that you’re in an accident, your insurance would pay up to your protected limit, less your share of the damages (called your “deductible,” which might be something like $500) — because you’ve been paying your monthly premium.
Although it might feel frustrating to make insurance payments each month, doing so is crucial in order to protect yourself financially. Your insurance premium offers you a predictable amount to pay versus the unpredictable and potentially larger cost of injuries or damages. In the example above, it’d be much better to pay $1,500 per year in insurance coverage plus a $500 deductible than to be saddled with $25,000 in medical bills and car damage following an accident. The same is true for the most common types of insurance, which include:
- Homeowners insurance
- Renters insurance
- Liability or umbrella insurance
- Life insurance
- Car insurance
- Health insurance
Factors That Affect Insurance Premiums
Regardless of the type of insurance you hold, insurance premiums are calculated based on several different factors. For example, your auto insurance policy will take your driving record, credit score, and previous accidents into account (among other things), while your health insurance policy might take your age and habits (e.g., smoking) into account.
What Increases Insurance Premiums?
The higher your “risk” is deemed by an insurance company, the higher your premium will be. Consider these examples:
- A smoker is considered a higher risk person on a life insurance or health insurance policy, and therefore their monthly premium might be higher than a nonsmoker.
- A driver with a history of three accidents will likely have a higher monthly insurance premium than a driver with a clean driving record.
- A homeowner in a fire-prone area will likely have a higher insurance premium than someone who purchased a home in an area less exposed to disasters.
- Similarly, someone who is older and has a shorter life expectancy might pay a higher life insurance premium than a younger person.
Similarly, the higher the potential cost of the pay-out to an insurer, the higher they will charge. Consider the home affordability of an expensive neighborhood, or the cost to replace a fancy car; these will likely require more insurance coverage as well, meaning your insurance premiums will be higher.
What Decreases Insurance Premiums?
The “safer” you’re deemed by an insurance company, the lower your monthly insurance premiums will be. For example, people with a lower body mass index (BMI) often have lower health insurance premiums than those with higher BMIs. Those with a clean driving record who don’t put many miles on their car each year will likely have a lower premium than their riskier counterparts. And homeowners who have a good home security system and fire protection measures in place will likely pay lower monthly homeowner’s insurance premiums.
When it comes to things like homeowners insurance and car insurance, often consumers with excellent credit will also qualify for a lower monthly premium. Even good grades are considered and lower insurance premiums for any students in school who are old enough to drive.
In addition, the amount of coverage you opt for (which we’ll cover in more detail below) affects your monthly insurance premium. In general, having more coverage will cost you more each month, while less coverage will cost you less.
How Much Insurance to Buy: A Personal Choice
Regardless of the type of insurance you’re considering, you will likely be able to choose from different plans. The more coverage you opt for, the higher your monthly premium will be. The less coverage you opt for, the lower your monthly premium will be, but the higher your deductible and out-of-pocket costs will be in the event that something happens. In short, the amount of money you choose to spend each month on your insurance policy dictates your level of coverage.
Here’s an example of this in action: If you opt for a lower coverage auto insurance policy, you might only pay $75 per month, but your deductible could be $1,500. That “deductible” amount means you can’t even approach your insurance company for any damages below $1,500, or you would incur the first $1,500 in damages before your insurance begins your coverage. If you pay for more coverage, your monthly payment might be higher, say $125 per month, but your deductible might only be $500.
The same goes for health insurance: If you opt for a high-deductible plan, your monthly payments might be low (say, $200), but your deductible will be high (say, $5,000), which could be problematic in the event that you have a costly medical expense like surgery.
It’s important to give ample thought to the amount of coverage you want before you sign up for a plan. Take a look at your finances and figure out how much you can realistically afford for your monthly premium. It’s worth considering opting for more coverage if you can afford it, as you’ll be safer in the event that something unforeseen happens.
You should also think about your personal circumstances. If you have a medical conditions that necessitate frequent trips to the doctor, you might want to opt for a health insurance plan with higher premiums and lower deductibles. Similarly, if you have a job that requires significant time on the road, you might want to consider a car insurance premium that is higher and comes with more coverage.
Keep in mind that most insurance plans can be adjusted. You can always change your plan to opt for more or less coverage later on.
In some instances, you might want to hold a specific plan for the short-term and change your preferences later on. For example, you might opt for a term life insurance policy (as opposed to whole life insurance, which typically costs more) while your kids are still young or while you’re still paying off your mortgage when you need the coverage the most.
An Important Part of Your Financial Plan
Insurance is a crucial part of any financial plan, and a key part of your monthly budget. Insurance reduces your risks and protects your property, your income, your lifestyle, and your family. When creating a budget, insurance should fall into your “needs” category, as it’s one of the best actions you can take to protect yourself financially.
Factoring in the potential cost of insurance is important when making big purchases — like a new car or home — as it will save you any unexpectedly high costs down the road. Remember to shop around when it comes to certain types of insurance, like renters insurance, homeowners insurance, auto insurance, and life insurance. Shopping around can help you find the lowest rates in your area from the best insurance providers.
Missing your monthly insurance premiums can not only lead to late charges and increased rates but also a lapse in coverage. Automate your payments so you don’t let any premiums and coverage fall through the cracks. By doing so, you’ll be able to rest assured knowing you can handle any emergency, financial or otherwise, that comes your way.