What Is an Insurance Premium?

An insurance premium is the amount of money an individual or business pays for an insurance policy. Insurance premiums are paid for policies that cover healthcare, auto, home, life, and others.

Once earned, the premium is income for the insurance company. It also represents a liability, as the insurer must provide coverage for claims being made against the policy. Failure to pay the premium may result in the cancellation of the policy.

Understanding Insurance Premiums

When you sign up for an insurance policy, your insurer will charge you a premium. This is the amount you pay for the policy or the total cost of your insurance. Policyholders may choose from a number of options for paying their insurance premiums. Some insurers allow the policyholder to pay the insurance premium in installments—monthly or semi-annually—while others may require an upfront payment in full before coverage starts.

[Important: There may be additional charges payable to the insurer on top of the premium including taxes or services fees.]

The price of the premium depends on a variety of factors including:

  • The type of coverage
  • Your age
  • The area in which you live
  • Any claims filed in the past

For example, the likelihood of a claim being made against a teenage driver living in an urban area may be higher compared to a teenage driver in a suburban area. In general, the greater the risk associated, the more expensive the insurance policy. In the case of a life insurance policy, the age at which you begin coverage will determine your premium, along with any other factors such as your current health. The younger you are, the lower your premiums will generally be. Conversely, the older you get, the more you pay in premiums to your insurance company.

Insurance premiums may increase after the policy period ends. The insurer may increase the premium for claims made during the previous period, if the risk associated with offering a particular type of insurance increases, or if the cost of providing coverage increases.

Special Considerations

Finding the Lowest Premiums

Most consumers find shopping around to be the best way to find the cheapest insurance premiums. You may choose to shop around on your own with individual insurance companies, and it's even easier to do by yourself online if you're just looking for quotes.

For example, the Affordable Care Act (ACA) allows uninsured consumers to shop around for health insurance policies on the marketplace. Upon logging in, the site requires some basic information such as your name, date of birth, address, and income, along with the personal information of anyone else in your household. You can choose from a number of options available based on your home state—each with different premiums, deductibles, and copays. The policy coverage changes based on the amount you pay.

The other option is to try going through an insurance agent or broker. They tend to work with a number of different companies and can try to get you the best quote. Many brokers can link you up with life, auto, home, and health insurance. You may need to be cautious, as some brokers may be motivated by commissions.

How Premiums Are Used

Insurers use premiums to cover liabilities associated with the policies they underwrite. They may also invest the premium to generate higher returns and offset some of the costs of providing the insurance coverage, which can help an insurer keep prices competitive. Insurers invest the premiums in assets with varying levels of liquidity and returns, but they are required to maintain a certain level of liquidity. State insurance regulators set the number of liquid assets required to ensure insurers can pay claims.

The Future of Insurance Premium Prices

Insurance companies generally employ professionals known as actuaries to determine risk levels and premium prices for a given insurance policy. The emergence of sophisticated algorithms and artificial intelligence is fundamentally changing how insurance is priced and sold. There is an active debate between those who say algorithms will replace human actuaries in the future and those who contend the increasing use of algorithms will require greater participation of human actuaries and send the profession into a "next level."

Key Takeaways

  • An insurance premium is the amount of money an individual or business must pay for an insurance policy.
  • Insurance premiums are paid for policies that cover healthcare, auto, home, life, and others.
  • Insurance premiums may increase after the policy period ends.