There are a lot of times when insurance is more complicated than it needs to be. It seems every aspect of insurance comes with a whole new dictionary of words to get to grips with.
Even what you pay for insurance has its own name; the premium. Ultimately that’s all your insurance premium is, but here’s a guide to how to better understand it — and potentially reduce how much you pay.
- What is an insurance premium on a policy?
- How often do you pay an insurance premium?
- How is a premium calculated?
- What can you do to lower your premium?
What is an insurance premium on a policy?
Essentially, this is the price of your insurance. The premium on your insurance policy is the amount of you pay for the coverage set out in your policy documents.
Think of it like this: When you buy your insurance policy, the insurance company is agreeing to cover your costs if certain things happen. This could be things like covering repairs to your home if a pipe bursts, to replacing your car if it gets totaled.
In return for getting these costs covered by the insurance company — should they happen — you pay the insurance company. The amount you pay the company is your premium.
How often do you pay a premium?
There is no set answer for how often you will pay. Monthly, quarterly, and even annual payments are possible. It depends on the type of insurance, the coverage period, and the insurance company.
How is a premium calculated?
Again, this varies across the different types of insurance but there a few things that they all have in common:
The type of insurance
In the case of auto insurance, your premium will vary depending on what types of car insurance you have. The more things your policy covers, the more you have to pay.
This is because the insurance company is only covering the costs relating to damage you might cause to other people when you drive. For example, damage someone else’s car, or another driver’s medical costs. If you only have liability coverage, you will have to pay for any damage you cause to your car.
According to the data from the National Association for Insurance Commissioners, the average amount spent on a liability policy in the US in 2015 was $538.73, for collision it was $322.61 and for comprehensive $148.04.
What you are insuring?
The thing you are insuring will play a part in how the premium is calculated.
Things like the age of the car, the type of vehicle it is, and the safety features it has can all play a role in determining your premium.
You can see how your car impacts your insurance rate by using Cover’s car insurance calculator tool.
With homeowners insurance, the age and condition of your home will be factored into the calculations. The location is also a factor, for example, if you are closer to a body of water or an area at risk of flooding.
The maximum amount an insurance company will cover you for also plays a part in the premium you pay.
In the case of auto liability insurance, a policy that covers you for the legal minimum in a state like California your coverage limits would be 15/30/5 (for more on what these numbers mean check out this article).
Given how expensive someone else’s medical costs could be if you are liable, you might opt for limits like 100/300/50 instead.
Of course, since the insurance company is potentially on the hook for paying out these higher amounts, they will charge you a higher premium in return.
The way the company will settle your claim can also alter the way your premium works.
When an insurance company pays to replace something that was damaged beyond repair, what they pay you can be calculated in different ways.
They could consider what the item was worth when it was damaged, so factoring in depreciation. This is known as Actual Cash Value.
The other main option is covering you for the cost of damaged or destroyed property is settling claims based on Replacement Cost. As the name suggests, a policy that settles claims this way will reimburse you the amount it would cost to replace an item new, not what item was worth when it was damaged.
Replacement cost usually means higher premiums, but in the case of a homeowners policy, this higher premium can be worth it in the long run.
Your personal circumstances
The type, level and settlement of your policy is only part of the story when it comes to your insurance premium.
There is a wide range of factors connected to your personal situation.
Where you live
Right down to zip code level you address affects your insurance rate. For example, the higher population density of cities will increase your rates. More people means more drivers on roads, so more potential for accidents.
Insurers will also look at crime in your area to establish the risk of someone stealing your vehicle, or how many other insurance claims they get in your area.
Insurers see younger drivers as more likely to be in accidents. According to the Insurance Institute for Highway Safety (IIHS) drivers aged 16-19 are three times more likely to be in a fatal collision than drivers over 20.
That’s why car insurance costs only really start to go down in your twenties. Premiums won’t automatically drop once you’re over 25. If you only got your license at 24, you might have to gain a few more years of experience first.
Your driving record
A clean driving record will generally mean lower auto premiums. Anything else has the potential to push your premiums up.
Insurers argue that there is a correlation between credit score and a person’s driving behavior. If you have a lower credit score, the premium on your insurance policy will be higher.
Women tend to see lower insurance premiums than men – particularly at younger ages. Until age 21 male drivers will pay about 20 percent more, but the picture is much more mixed for drivers over 30.
Tying the knot can potentially save your money on your premiums. Again insurers view married people as less likely to have accidents – even if the data comparing married people vs single isn’t all that solid.
Married couples can also find savings by combining their policies and bundling types of insurance together.
Past insurance claims
Any previous claims you made could play a part – especially if you were the at-fault driver. If you weren’t at fault or if the claim was on your comprehensive policy, the impact on your costs should be lower – in theory.
However, research by the Consumer Federation of America (CFA) found that even for not-at-fault claims rates can increase.
What can you do to lower your premiums?
This huge range of factors is what insurers look at when they ultimately decide your premium.
But what you pay isn’t set in stone. There is plenty you can do to find a lower insurance costs.
However, because different companies look at these factors (and many others) in different ways, you could get vastly different quotes from different companies.
Taking the time to get more quotes by shopping around could really save you money.
Raise your deductible
There’s a direct relationship between higher premiums and a lower deductible. This makes it a straightforward route to lower auto insurance costs.
Keep in mind that if you do get in an accident the money you might have saved from lower premiums would quickly be offset by the higher deductible.
Work on your credit score
Car insurance isn’t the only reason to be vigilant of your credit score. But if you maintain a high one, or work to increase it, you should be rewarded with lower premiums.
Hunt for discounts
There a handful of discounts you may be qualified for. You may get a lower rate if you:
- Have a clean driving record
- Have low income
- Are affiliated with a school, employer, or with the military
- Are a senior
- Won’t use your car much and will have low mileage
- Are a homeowner
- Seek out a home and auto insurance bundle through the same carrier
- Purchase a multi-car policy
- Pay in full instead of monthly
- Opt in to auto-pay or paperless billing
- Have anti-lock brakes or anti-theft feature on your car
- Buy a green car (i.e., eco-boost features) or hybrid – if you’re looking for coverage like Toyota Prius insurance you could be eligible for a discount.