What Is an Insurance Premium?
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UPDATED: Mar 13, 2020
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Insurance Q&A: “What is an insurance premium?”
Seems like about half of our weekly paychecks! Right? Well, hopefully it’s not that bad for most of us.
Jokes aside, an insurance premium is just a fancy industry term to describe the price you pay for insurance coverage during a given period of time, whether it’s one month, six months, or an entire year.
It is essentially the cost you must pay for the risk the insurer is willing to take should they have to make a payout following a claim.
All insurance plans, whether it’s auto insurance, health insurance, home insurance, or life insurance, require that you pay this premium cost, which will vary based on the type and amount of coverage, along with certain risk factors.
Instead of paying for accidents and other unforeseen events out of your own pocket, you pay a company beforehand to take on that risk instead. Of course, insurance providers are only agreeing to it because they like their chances (of a positive return on their investment).
Why It’s Called a Premium and Not a Payment
- The word premium is an old-fashioned term
- Or perhaps a good sales tactic
- Because payment doesn’t sound as good
- As asking someone to pay the premium
As to why it’s referred to as a premium, it’s likely an old-timey term that has stood the test of time. Why it’s not just called a payment is perhaps a mystery, or maybe just a good sales tactic to make it seem a little less unappealing.
One could argue that it’s not a bill because you’re paying in advance for something that might not happen. Or rather, paying to protect yourself from something that may happen.
Whereas other purchases are generally for defined benefits, such as rent for a roof over your head. You won’t maybe get shelter, you will get shelter if you pay your rent.
With insurance, you may get nothing, though you still are technically getting something in the way of the transfer of risk, even if you never actually use it.
Many people will interchangeably use the term “insurance rate,” as in, “my insurance 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 Insurance Premium Due Upfront?
- The premium cost can generally be paid in full or in installments
- If you pay the premium in full you may receive a discount
- Whereas a premium payment that is split up
- Might have a higher total cost
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 car 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 a Premium Policy Length?
- Compare a variety of car insurance companies (or other lines if you’re shopping for something different)
- Preferred auto insurance premiums typically ask for a 6-month minimum policy
- Non-standard companies may allow 1-, 2-, and 3-month policies
- All companies should offer several payment options including cash, check, credit card, etc.
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 car insurance limits.
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.
Do Insurance Premiums Increase Every Year?
- Most stuff we buy gets more expensive over time
- Insurance has actually bucked this trend lately
- With car insurance rates going down each year
- If you’re into saving money, be sure to shop around extensively and collect several insurance quotes
Seems like it, doesn’t it? This is always a tricky question to answer.
The bottom line is; EVERYTHING that’s useful gets more expensive over time.
For example, a VHS recorder costs less now than it did in 1985, because it’s not useful any more. Cars and food, on the other hand, are still useful and have increased in cost since 1985.
But do insurance premiums go up every year? NO, they don’t. In fact, insurance rates have been going down every year for a long time now.
But if you’re not “shopping” your rate, you may experience a yearly increase in your car insurance premium or health plan.
It cannot be said enough. Shop your rate online and visit a local independent insurance agent to get multiple quotes all at once.
This is the single best way to keep your premium from increasing, and you may even be able to snag a lower premium than what you had last year.
If you work with a “chain” insurer who can only offer you one rate…and it goes up…you’re stuck with it.
And Lebron James isn’t going to make up the premium difference for you, especially after losing to Golden State in the finals…