A:

An insurance premium is the money charged by insurance companies for coverage. Insurance premiums for services differ from company to company, so it is advisable that individuals shop around for insurance premiums. However, it is important to note that, sometimes, insurance premiums quoted are slightly different from the premiums charged. The difference between the quote and the actual charge can be attributed to the way the insurance premium is calculated. The amount of insurance premiums charged by the insurance companies is determined by statistics and mathematical calculations done by the underwriting department of the insurance company.

The level of insurance premium charged to a customer depends on statistical data that exists about life history, age and health. For example, an 18-year-old man who drives a red sports car is more likely to pay a higher insurance premium than a 50-year-old man who drives a four-door sedan. Every customer that applies for insurance goes through the underwriting process. The underwriting process involves investigation into familial diseases, analysis of reports like medical information bureau and motor vehicle reports. After the information is gathered and analyzed, they are typically analyzed by a statistician, called actuaries, hired by the insurance companies. After analyzing the data, the actuary tries to predict how likely the insurance applicant will make a claim on their policy. The higher the probability of a claim, the higher the premiums usually are.
The actuaries are also responsible for studying mathematical data and compiling "mortality and sickness" tables, which are used to predict prospective losses due to death and sicknesses. The mortality and sickness tables are basically tables that assign probability to gender and ages about the likelihood to get sick or die. The actuaries use these tables to develop models that determine how likely it is for a particular individual to get sick or die at a particular time, based on the data gathered for that individual. Based on the results of the analysis of data and the information generated from the mortality and sickness tables, a premium is assigned or charges to the client. (To learn more about the industry, check out The Industry Handbook: The Insurance Industry)

RELATED FAQS

2. ### How can premium financing of life insurance help high net worth individuals (HNWI)?

Discover the various benefits that premium financing of life insurance policies might enable high-net-worth individuals to ... Read Answer >>
3. ### What is the difference between the death benefit and cash value of an insurance policy?

Understand the difference between the various components of a life insurance policy including the death benefit and a policy's ... Read Answer >>
4. ### Should I be worried about my insurance company?

Yes, policyholders should also take a serious look at the financial stability of their current insurance company especially ... Read Answer >>
5. ### What is reinsurance?

Reinsurance occurs when multiple insurance companies share risk by purchasing insurance policies from other insurers to limit ... Read Answer >>
6. ### How do I calculate insurance premium tax?

Related Articles
1. Investing Basics

### The Industry Handbook: The Insurance Industry

As a result of globalization, deregulation and terrorist attacks, the insurance industry has gone through a tremendous transformation over the past decade. In the simplest terms, insurance of ...
2. Insurance

### For Life Insurers, Making Money Is A Numbers Game

Life insurance is a data-driven industry that relies on complex financial models to predict future expenses and income from premiums and investments.
3. Insurance

### 5 Ways to Lower Life Insurance Premiums

Learn several effective methods for lowering life insurance premiums. These include quitting smoking and considering term life insurance.
4. Home & Auto

### Intro To Insurance: Fundamentals Of Insurance

By Cathy ParetoHow does insurance work? Insurance works by pooling risk.What does this mean? It simply means that a large group of people who want to insure against a particular loss pay their ...
5. Home & Auto

### 6 Ways To Save On Insurance

Love it or hate it, insurance policies are a necessary expense in everyone's life. Learn the top tricks for saving money on your various insurance policies.
6. Insurance

Learn how to read one of the most important documents you own.
7. Insurance

### Can Going to the Gym Lower My Insurance Premiums?

Find out whether a gym membership and living a healthier lifestyle can lead to lower insurance premiums or other financial rewards.
8. Insurance

### What Happens If Your Insurance Company Goes Bankrupt?

When insurance companies go bankrupt or face financial difficulty, it's bad news for policy holders.
9. Home & Auto

### Intro To Insurance: Conclusion

By Cathy ParetoInsurance is an integral part of any personal financial plan. The type of insurance and the amount of coverage you obtain all depends on your unique financial and family circumstances, ...
10. Options & Futures

### Permanent Life Policies: Whole Vs. Universal

If you're looking for life-long security, choosing between these two is the key.
RELATED TERMS
1. ### Insurance Underwriter

A financial professional that evaluates the risks of insuring ...

1. The total cost of an option. 2. The difference between the ...
3. ### Classified Insurance

Insurance coverage provided to a policyholder that is considered ...
4. ### Annual Renewable Term (ART) Insurance

A form of term life insurance that offers a guarantee of future ...