What is an Insurance Premium?

Insurance Q&A: “What is an insurance premium?”

Seems like about half of our weekly paycheck!

Jokes aside, an insurance premium is just a fancy industry term to describe the price you pay for insurance coverage for a given period of time, whether it’s one month, six months, or an entire year.

Many people will interchangeably use the term “rate,” as in, “my rate is way too high!”

How your insurance premium is determined is a whole other conversation. Just know that your credit history (insurance score), the coverage you choose and your personal history will all play a role in how much premium you end up paying.

Now that we’ve defined the term “insurance premium,” let’s get into some other pertinent details.

Is the Entire Premium Due Upfront?

For almost every insurance policy sold, the insurer charges a premium to be paid upfront or in installments, in exchange for a certain type and amount of coverage for a specified time period.

For example, a $500 insurance premium may provide 100/300/100 liability limits of auto insurance coverage for a one-year period.

You may be given the option to pay the $500 insurance premium in one lump sum or monthly at a rate of $41.67 per month.

But watch out for installment fees if you elect to make monthly payments. These fees can range from $2.00 to $15.00 per month, pushing up the true cost of your insurance premium!

The term, or length, of your policy is a factor in determining the cost of your insurance premium (how insurance rates are determined).

Put simply, you may end up paying more for your insurance if you commit to a shorter term.

If you were to purchase 12, single-month policies, you would end up paying more in insurance premiums than if you bought an annual policy.

Remember, the insurance company has to pay people to process every new policy they write; therefore, the cost gets passed on to you in the form of a higher insurance premium.

How Do I Choose?

Insurance policy premiums vary widely by the type of insurance you purchase and the type of insurance company you elect to purchase your coverage from.

Typically, “preferred” auto insurers will not write less than a six-month policy, while “non-standard” auto insurers will write one, two, or three-month policies, but do not offer coverage above what is required by your State Department of Insurance – although, some may offer slightly higher than minimum liability limits.

The difference between preferred and non-standard insurers typically has to do with your insurance history, i.e. prior coverage, tickets and accidents and your insurance score.

Be sure to work with your insurance company and/or an independent insurance agent to determine what your options are.

It is recommended that you shop around for insurance quotes online and elsewhere to determine if you’re really getting a good deal.

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This post was written by The Truth Team on November 15, 2009 Comments (0)