If you’re new to the world of insurance, you likely aren’t familiar with all the terminology, but that’s okay! Doing a little research and asking the right questions can go a long way. After all, your insurance company is here to protect you and walk you through the process. However, if you really want all the answers, you should speak with a broker. It will help you learn about everything you need to know, including what an insurance premium is.
So, what is an insurance premium? That’s a great question! In our comprehensive guide, we will explore what an insurance premium is and so much more. Let’s discuss insurance premiums and their impact on your policies.
Understanding insurance premium
An insurance premium is the amount of money that you (the policyholder) pay your insurance company in exchange for coverage. Basically, it ensures you will receive compensation when any damages or losses outlined in your policy occur. This is as long as you make timely payments. You will have to pay your premiums either monthly, semi-annually, or annually, depending on your insurance company and policy.
How do insurance premiums work?
Whether you have car insurance, home insurance or life insurance, your insurance premiums will work the same way. As the policyholder, you keep your plan active by paying your insurance premiums on time. If you miss payments, you risk getting your policy cancelled and any future insurance claims denied.
Why do insurance companies collect premium payments? The purpose of collecting premiums is to ensure the insurance company has enough money to provide compensation in the event that the policyholder has to make a claim. Sometimes, the insurance company will have more money than what they have to pay out for a claim and cover operational costs. Anything leftover is known as an earned premium and is a profit for the insurance company.
How does your insurance company calculate insurance premiums?
The cost of your premium depends on many factors. However, it mainly comes down to your risk level. In other words, your insurance provider assesses how much of a risk you are to insure and calculates the costs of your insurance policy accordingly.
It’s important to note that many factors influence how much you will pay, but these will vary depending on the type of coverage you purchase. Let us break them down for you:
Car insurance premiums
No two auto insurance providers are the same. Despite this, there are a few aspects that the majority of car insurance companies use to calculate auto insurance premiums. These always relate to driving, including the type of vehicle you own and your personal driving record. Age and gender also come into play, but aren’t as significant. Here’s everything you need to know about car insurance costs:
Driving record
Auto insurance companies will review your driving record and will be checking for traffic violations and at-fault accidents. Having these on your record makes you more likely to file a claim in the future and usually leads to higher premiums.
Mileage
If you drive more often, you are more likely to get into an accident. However, if you drive less, you will pay lower premiums and might be eligible for discounts.
Where you live
Those who live in big cities will pay more for car insurance than those who live in rural areas because an accident is more likely to occur in an area with traffic and congestion. Additionally, people living in areas with high crime rates can also expect to pay higher premiums.
Vehicle you drive
The price of your vehicle, how much it costs to repair, and its safety features also impact your car insurance premium. Some people don’t know that certain vehicles are more prone to theft. If you have an expensive car or a model that's frequently stolen, car insurance costs more. If the opposite is true, you will have lower car insurance premiums.
Age
Your age directly correlates with the amount of driving experience you have. Because of this, most insurance companies charge younger drivers more until they gain more experience on the road and maintain a clean driving history for a couple of years.
Gender
Unfortunately, males are statistically more likely to get into a car accident. Because of this, auto insurance premiums are often higher for men, especially young men who already pay the highest car insurance premiums in the country.
Credit score
When you apply for insurance coverage, your future insurance company will review your credit score. It’s believed that those with a good credit score are less likely to file an insurance claim than those with lower credit scores.
Amount of coverage
In the world of insurance, some types of coverage are mandatory while others are not. Basically, if you opt for additional coverage, you should expect to pay more, but you will receive more financial protection in exchange.
Home insurance
Similar to auto insurance companies, those who offer home insurance policies have a checklist. This consists of everything that determines the costs of your home insurance policy. The location of your home and how much it would cost to rebuild it are the most important ones. Below is everything you need to know about home insurance and dwelling coverage:
Location
Where is your home located? If you are in an area with high crime rates, you should expect to pay more for insurance coverage. This is determined based on the amount, type and cost claims of people with the same postal code.
Price of rebuilding
An expensive multi-story mansion costs more to rebuild than a tiny home that you can tow around. So, logically, insurance premiums are higher for those larger spaces. That’s because the home’s construction, square footage and number of floors are taken into account.
Age of home
Generally, older homes cost more to insure — people often think the opposite. However, this is far from the truth because certain features and building materials are more difficult to find now, which increases home insurance premiums.
Credit history
Similar to your auto insurance policy, your credit score is used to calculate your home insurance premiums. Someone with a lower credit score is statistically more likely to file a claim.
Marital status
Home insurance companies perceive married couples as less likely to file a claim than their single counterparts. Married couples can easily save on home insurance premiums.
Life insurance
When it comes to life insurance, many factors can affect your insurance premium. However, like health insurance in the United States, the cost of your life insurance premiums will vary depending on your life expectancy. These are the several factors that affect the costs of life insurance premiums:
Age
As you get older, you are more vulnerable to injuries and illnesses. Because of this, you can expect to pay more for your life insurance policy as you get older.
Gender
Statistically, women have longer life expectancies than men. Because of this, a man can expect to pay more for his life insurance policy.
Occupation
Your profession can also affect the cost of your life insurance premiums. For example, truck drivers, construction workers and law enforcement officers are more vulnerable to fatal injuries, which increases the costs of their life insurance policies.
Medical history
Those with pre-existing medical conditions and a history of ailments and injuries pay premiums that are higher than average when it comes to life insurance. That’s because industry experts such as insurance agents see them as higher risk and more likely to make a claim.
Smoking status
Those who smoke are more likely to have a higher premium. That’s due to the fact that smoking puts them at a higher risk of developing medical conditions, such as lung cancer, later in life.
Hobbies
Participating in extreme sports such as skydiving and scuba diving can increase the premium amount you have to pay. Partaking in these activities increases your risk of injuries.
How can you lower your insurance premiums?
Did you know that you’re probably paying more than you should for your insurance policy? Luckily, it’s possible to lower your insurance premium. Even if you don’t have extensive claims history, your insurance company covers the majority of the costs if you do have to make one. Below are some ways to reduce your insurance premiums:
- Ask for quotes from multiple insurance companies before making a decision
- Only opt into mandatory coverage
- Use discounts to your advantage (e.g. multi-car insurance, bundling home and auto insurance, etc.)
- Maintain a good credit score
- Get a higher deductible to reduce your premiums (the amount you pay before your insurance company covers the costs of a claim)
- Look for a better price when it’s time to renew your policy
Reach out to BrokerLink to learn more about insurance premiums
Regardless of your claims history, speaking to a broker when it’s time to purchase an insurance policy is the best choice. At BrokerLink, we will help you get the coverage you need while you pay the best insurance rates. What are you waiting for? Call, use our online quote tool or visit one of our community branches across Canada today.
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