Insurance premiums are an amount that a person pays to his insurance agency as a part of the insurance contract to keep it intact. Different insurance companies have differentiated premium policies.
What are insurance premiums?
To maintain an insurance policy, it is inevitable that one has to pay an insurance premium. The amount of insurance premium is paid after a period specified by the insurance company. It is mostly monthly or annually or even for six months. The period is different for different insurance companies. The insurance contract specifies that the insurance company will cover a financial loss faced by an individual. In return, he has to pay them a small amount regularly as instructed by the insurance agency.
The type of premiums also depends upon the type of insurance one has applied. The insurance premiums can differ according to their amount and the time to pay them. Actuaries are people who work for insurance companies. They examine the insurance and find out all the risks involved with the insurance policy. Their examination includes observing the accident and disasters that can occur.
How recently can the accident occur and, what is the likeliness of the disaster happening again? They also determine how likely is it that an individual will file a claim if an accident occurs. As a result, it determines the amount of cost that the insurance company covers if an accident does occur.
Upon collecting all the required information, it is written on a chart known as an actuary table. The actuary table is given to a person known as an underwriter. The job of the underwriter is to determine the exact amount that a person or a company asking for insurance has to pay. The underwriter examines the data of the actuary table. The information provided by the person or company applying for insurance is taken into account.
The underwriter then calculates how much premium is required for the person to pay so it covers the cost of an accident or the disaster if it ever occurs. He also provides the time duration for paying each premium. It can be monthly or annually that depends upon the type of insurance.
One way insurance companies benefit from insurance premiums is when a person pays the insurance premiums for some time and, it covers the cost of an accident that may occur. In this way, the company has accumulated the amount required for the possible accident or disaster. The additional premiums amounts collected will add to the profit generated by the insurance company.
Different types of insurance premium:
Insurance premiums for cars:
Car insurance premiums are the amount a person has to pay for covering the cost of his car in case of an accident. There are some things that an insurance company will look at when they specify the premium for car insurance. It includes the type of car one drives, the car condition, the safety features it contains, the residential area of an individual, and how far a person commutes. In addition to that, the insurance company also looks at if a person parks his or her car in a garage or no.
It is because the likeliness of damage to a vehicle is greater for automobiles that are not parked in a garage than those that are parked in one. In this case, the premium will be high as the risk is more. There is also the risk of car theft for cars that are not parked in garages that adds to the premium amounts payable to the insurance company. The greater the risk of loss, the greater the premium amount.
In addition to that, the underwriters also examine the driving record for the person who is applying for the insurance. It includes the number of accidents that one has had in his life and the number of speeding tickets that one has. They also look at other possible risks. Like if a person is known or has been indulged in drunk driving. The premium for people with a higher chance of accidents and a larger number of tickets is higher as they are the people who have a greater risk of accidents in the future.
The insurance premium of homeowners:
In the case of homeowners, the underwriter has some requirements to look at when stating the amount of premium that a homeowner is required to pay. The main idea is the greater the risk and the hood of damage occurring to the home, the higher the insurance premium will be. The underwriters look at the climate of the residential area of the insured. Furthermore, he also takes into account the natural disasters that have occurred in that specific area. It also includes how likely it is that there will be more natural disasters in the area.
Moreover, how many such incidents occur in one year? In addition to that, the underwriters also examine the age of the house and the age of the roof of the house. Lastly, the worth of the home is also a consideration. In cases that will lead to higher costs on the insurance company, the premium is higher. The insurance premiums for newer houses are low as they are freshly constructed and have a lower risk. Homeowners also take care of a new home to prevent any damage.
The renter’s insurance premiums:
There are also renter insurance premiums that are similar to that of homeowners insurance premiums. The renter’s insurance premiums changes as a person change his location. Like the homeowner’s insurance premiums, in renters insurance premiums, the underwriter examines the residential area and if an individual has a history of filing insurance claims. One thing that is the same for all insurance premiums is that an insured has to pay more if he has more coverage.
The premiums for life insurances:
The life insurance premium rates are imposed upon considering several health-related situations. The insurance premium for life insurance revolves around the idea that; the more depreciated the medical condition of an individual, the higher is his life insurance premium. The underwriter examines the medical history of the insured. He sees whether or not a person consumes alcohol or is involved in tobacco-related activities.
He checks if the insured was or is involved in any activates that may prove to be life-threatening. An insured has to take several medical tests. A lab exam is taken that provides the complete health report of the individual. These factors are with the addition of the insurance coverage. The insurance company determines the premium that one has to pay the insurance company upon applying for an insurance plan.
The premiums for health insurances:
Many people tend to get their life insurances from their jobs. The insurance premiums are determined by the type of coverage one chooses as his life insurance. Several other factors can affect the insurance premium of a person. It happens when a person purchases his health insurance coverage through a health insurance exchange. The factors include the type of health insurance that are available and the number of competing companies on the exchange. It also consists of the number of people purchasing the insurances at the insurance exchange.
There are also many different types of insurance other than health, life, homeowners insurances. Professional and international athletes who compete at a high level have their bodies insured. Furthermore, when running a business with many employees, the employer requires workers’ compensation insurance.
These insurance policies are exceptional cases and are often immensely costly. The insurance premiums of such policies are not in the budget of a normal person. Neither is this the requirement of a person.
The reasons that specify insurance payment to insurance agencies as ‘premiums’:
The word premium was in use since the 18th century when insurances were a new subject. At the time, a premium was referred to as the price that was attached to a product. It originates from the Latin word ‘premium which means a reward or a price bounty. Today the word premium is used in another meaning.
The insurance premium amounts are imposed viewing the possibility of an individual making a claim. The premium has an addition to the insurer’s business cost. It may reflect the benefits of any discounts or bonuses that are offered by the insurer. The finalized insurance premium amount payable consists of territory stamp duties and Goods and Services Tax. The taxes levied can increase the amount by a large percentage. It overburdens the insured.
Effects of the deductible on insurance premiums:
Deductibles are a part of all types of insurances except for life insurance. The deductibles are the amount of cost for an insured product that a person is liable to pay from his pocket and is not covered by the insurance company before the coverage is applied. An advantage of the deductible is that the higher the deductibles, the lower is the insurance premium and vice versa.
One can save a large amount of money by having a high deductible plan along with a health savings account. In the case of car and homeowner insurance, it is best to start with $1000 as deductibles as it saves up to $1000 of the emergency fund and is the first step to gain control over a person’s financial situation.
However, this is a random amount and, the deductible can be higher or lower for other people depending upon the type of insurance plan and the insured product. The best way to do this is to perform a break-even analysis that determines the costs and benefits of a situation. Upon carrying out the break-even analysis, one can decide the amount of deductible he can keep.
For car insurance, one other thing to consider before the deductible is how often one has to file a claim. It is best to keep a lower deductible if one lives and drives in an area where accidents are common. The premium in such cases is higher but, the insurance company covers the cost of damage to the vehicle.
The insurance agencies provide a limit to the insurance holders for the cost of damage that they can cover. The limit is placed upon consultation with the insured. The higher is the limit means the higher is the insurance premium to be paid by the insurance holder at time duration. One advantage of this is that upon the completion of an insurance policy if a person recently gets into an accident, the insurance agency will cover his cost even If the person has not paid the premium amount to cover the amount.
It is beneficial to the customer but not to the insurance company. However, this is an extremely rare case and, the insurance company will perform a complete investigation before paying for the damage. They try to find a reason by which they can get out of paying for their customer. At the end of the day, the insurance agencies have an aim to make profits and they will do all that they can to achieve those profits as long as it is legally permitted.
Reason for changes in insurance premium prices:
There a several reasons that may lead to a change in the prices of the insurance premiums that are paid by the insurance policy users. The change in premium prices is usually seen when a person renews his insurance policy. The prices will change even though one’s situation and circumstances are still the same.
One other factor that may lead to a rise in an individual’s premiums is that the number of risks has seen an increase. As mentioned earlier, the greater the risks involved translates into the greater the premium amount levied on one. It is also the opposite. If the risks have decreased, the premiums levied on an individual will also see a decrease. Sometimes the insurance agencies do not mention it in such a situation as it means more revenue generation for them.
Several external reasons may lead to a rise or fall in the insurance premium prices. The prices of premiums may rise and fall due to the inflation rates of a county. The insurance companies change the prices concerning the inflation rates. Moreover, whenever there is a new government, there is a change in taxation policies. The rate of taxes may also play a part in an increase or decrease in premium prices.
The number of claims issued by an insured is yet another factor when considering the premium prices. An increase in the number of claims will simultaneously increase the price of premiums levied on the insured. In addition to that, the claims due to natural disasters including tornadoes, cyclones, and earthquakes can also lead to an increase in premium prices. Such insurance claims are costly to insurance companies. When such disasters take place, the insurance companies have to cover many costs.
They have to provide compensation for all the people affected by the natural disaster and increase the premium prices to recover. Additionally, the value of the insured may change. If a person has a vehicle that is insured, the amount of premium that one has to pay for the car will decrease as the car gets older as it decreases in value. It is the same for all other products that are insured. The premium prices may also arise if the value of the product increases in the market.
Furthermore, there may be some reasons that can lead to regional or even global changes. The global changes can impose a drastic or beneficial effect on the premium prices.
When the premium prices of a person for a specific insurance policy rise, one should terminate his policy. One should not deal with that insurance agent and look for cheaper and alternative plans provided by different insurance agencies. One should change his insurance policy after some time if he feels that the circumstance in his life has changed. In this way, he can find a cheaper option. Other companies may review your situation and can conclude that there are fewer risks involved than before. It will reduce the premium prices levied on an individual.