What is an Insurance Premium?

Security and peace of mind is a package anyone would grab at any cost. Living life with upside downs can be very stressful and overwhelming.  When an uncontrollable adverse event occurs, these times make us feel as if the world we built for our dreams and people we love has ended. 

Indeed, the concept of insurance helps us overcome many of our fears of the future. Having an insurance is the same feeling as not getting wet when it rains because you have an umbrella. It gives us a different perspective on how to face unfortunate scenarios with confidence and readiness. It is a different thing to be so much safer than ever. But of course, nothing comes for free. If you go shopping, you’ll see that everything comes with a price tag. You have to pay for the things you want to possess. In short, if you want security and peace of mind, then you have to earn it. And one of the many ways to be secure and at ease is through insurance. There are different kinds of insurance which you can be a part of, depending on what you need and your capability to pay. But we’re not going to discuss it further. Instead, we’ll talk about the price tag of insurance which we commonly called as premium.

What is a Premium? 

Since every profit needs investment, so is protecting one’s life, family, property, and even pets. Saying this, an idea might have come to your mind what premium is. Premium is the price of the insurance you entrust to cover your precious belongings like your house – for example. The insurance company collects most of the premium insurances regularly (monthly or annually, depending on the policy you selected) to keep your coverage active and continuous (to continue the state of being insured). Let’s say, you buy a house insurance and is regularly giving your contribution when your house was destroyed due to a qualified disaster (based on the policy you agreed), this means your insurer (insurance company) will shoulder the expenses, and you are safe from the cost of repair and reconstruction. However, when you suspend your payment at the time you encounter the said circumstance, the insurer can void the policy and is free from any obligation of your home’s rebuilding.

Why Premium and not Payment?

Come to think about it; if a sales agent approaches you and sells something that needs payment, you may decline it automatically without hearing what it has to offer. So instead of mentioning “payment”, a premium is a lot nicer to hear. Well, actually, they convey the same thought, but the word “premium” is a bit lighter to take in. Payment is more on bills with dues which give you headaches all the time while a premium is like an investment to things that gives you greater benefit in return.

How Much Does It Cost?

There is no specific range as to how much an insurance premium can cost. It always depends on the type of insurance you want to purchase and the coverage you choose. That is the reason why most insurance experts would recommend interested buyers to shop for insurance first before making a selection. It is always best to gather information from different insurance companies and compare the cost and policy they offer. In this way, there’ll be a higher possibility for you to choose the best premium – one that provides better benefit yet saves your pocket from distress.

If the Cost is Not Specified, how is it Calculated then?

When calculating how much would the premium cost in a particular policy, many factors take place. However, the primary key to it all is how likely you will file for a claim or how frequent you’ll possibly make use of the coverage. In short, risk factor holds the cost. It’s not just about how much risk you’ll possibly encounter, but it’s more on how much risk the company is gambling while granting you protection. So you may have an idea already that the higher the risk the insurer takes, the higher the premium you’ll have to pay. 

The insurer also determines a pool of high-risk individuals and low-risk individuals to make sure that business will keep going. Therefore, if there is an area where insurance companies cannot profit from the low-risk group, then the cost of a premium for the high-risk group will totally be a lot higher. 

Other factors that affect the cost of premium are as follows: the type of insurance and the coverage of insurance you need, the size of your deductible, and your personal data such as age, gender, location, health history, including other determinants that you may have a grip of control.

To understand more of the other factors involved, let’s take a look at them closer.

Type of Insurance and its Coverage

If you shop for insurance, you’ll definitely find a lot of it in the market. Even if you already have a specific insurance in mind, life insurance – for example, you’d still have a difficult time selecting since this insurance has subtypes (whole life and term). Depending on what subtype you choose, the cost of your premium is adjusted eventually. As you can see, insurance companies run their insurances into various options with different benefits it offers. If you opt to get more benefits from them or have complete protection, then expect to pay a costly premium. 

The Size of Deductibles 

Since wanting to be fully protected means paying expensively, there is another way in which you can save yourself from a high maintenance premium by selecting an insurance policy with higher deductibles. Deductibles are the percentage of expenses you pay by yourself deducted from your insurer’s share when you file a claim. 

Your Personal Data

Last but not the least, your background information also determines how much will be the cost of your premium. This includes where you live, the condition and type of property you own, your insurance history (e.g., number of claims you filed), your current health status (for health insurance) including your age and gender. Not to discuss age discrimination, but in reality, younger individuals are most likely to access a lower cost of insurance than older ones since they’re still much healthier and unlikely to make use of the protection more often.

Overall, premium is of different costs to different buyers. If you are a potential one, make sure to review the possible factors that may affect your contribution. Then again, shop, collect, and compare. 

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