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Insurance Premiums: What They Are And How They Work

Dan Rafter7-minute read
August 13, 2021

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No one likes paying for insurance, whether you’re taking out a life, health, auto or homeowners policy. These policies, though, can protect you from a big financial headache should you total your car or suffer a serious illness. An insurance policy will provide you financial protection should your home be damaged or destroyed by fire, lightning strike or other disaster.

Insurance, though, doesn’t come free. There are many costs of owning insurance, from deductibles that you’ll need to pay out before your insurance coverage kicks in to the copays you make when visiting your doctor. But the biggest expense most face with insurance? The regular premiums customers pay to keep their insurance policies active.

What Is An Insurance Premium?

When you take out an insurance policy, you’ll have to pay a premium, or fee, on a regular basis. This is the cost of your insurance policy.

Your insurer will set your premium before you sign up for your insurance. It will vary depending on several factors and the insurance coverage for which you are applying.

You might have to pay to your insurance premiums each month, every quarter, every 6 months or once a year, depending on the payment plan you’ve set up with your insurance provider.

Your insurance premium is the payment you make on an assigned schedule – maybe monthly, quarterly or yearly – for your insurance coverage. You’ll pay premiums for life, auto, homeowners and health insurance.

Factors That Affect Insurance Premiums

Your habits, where you live, the amount of coverage you’re taking out and the size of your deductibles will all affect how much you pay in insurance premiums.

As an example, your life insurance policy will come with a lower premium if you’re young and healthy. Your auto insurance policy will come with a higher premium if you have speeding tickets and accidents on your driving record.

You’ll pay a higher premium, too, whenever you take out a larger insurance policy. For instance, a life insurance policy that pays out $100,000 if you should die will cost less than one that pays out $500,000.

Deductibles are an important factor, too. This is the amount you must pay out of pocket before your insurer’s coverage kicks in. The larger the deductible, the lower your premium.

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Types Of Insurance Premiums

Not all insurance coverage comes with the same type of premiums. You can expect the way you pay your premiums for health insurance to be different than how you pay for homeowners insurance, for instance.

Here are some examples of the different insurance premiums you might pay each year.

Auto Insurance Premium

It’s illegal in all 50 states to drive without auto insurance coverage. If you want to hit the road, then, you’ll need to be prepared to pay for auto insurance premiums.

The size of your premiums, though, will vary based on several factors. If you have an older car, you might drop the collision coverage offered by insurers. Collision insurance helps you pay for the repairs needed to your vehicle. If your car is old, you might prefer to drop this coverage and simply buy a new vehicle if your old car needs extensive repairs. Eliminating collision coverage will drop your auto insurance premium.

If you take out an auto insurance policy with a higher deductible, your premium will fall, too. Say you take out an auto insurance policy with a low deductible of $1,000. You’d have to pay $1,000 out of pocket before your insurance kicks in. If you take out an auto policy with a deductible of $5,000, your insurance premium will be lower because you must pay so much more on your own before your coverage takes over.

You can also lower your auto insurance premium by investing in an auto alarm system, maintaining a clean driving record, driving fewer miles each month and buying a car that isn’t as attractive to auto thieves.

Homeowners Insurance Premiums

If you rely on a mortgage to finance the purchase of a home, you’ll have to invest in homeowners insurance. That’s because lenders won’t give you a mortgage without this insurance.

But even if you’re paying for your home in cash – or you’ve paid off your mortgage – you should invest in homeowners insurance. It pays out if your home is damaged or destroyed, helping you to rebuild. It also covers burglary and will cover the costs of medical expenses in case someone is hurt on your property.

How you pay your homeowners insurance premiums depends on whether you have an escrow account with your mortgage lender. Most lenders require that you create one of these accounts when you apply for a mortgage. In an escrow arrangement, lenders collect extra money with each mortgage payment. This money is then funneled into a noninterest-bearing escrow account in your name. When your property taxes and homeowners insurance bills are due, your lender uses the money in these accounts to make these payments.

If you don’t have an escrow account, you’ll be responsible for saving the money for your homeowners insurance premiums and paying them on your own.

The size of your homeowners insurance premiums will vary based on several factors. The more coverage you want, of course, the higher your premiums will be. Premiums will be higher, too, if your home is larger, if it’s older and if it sits in a community with more residential burglaries. You can reduce your homeowners premiums by investing in smoke alarms, putting in hail-resistant roofing, installing a home-security system and by adding other safety features.

Life Insurance Premiums

Life insurance premiums vary based on your age, health, weight and habits. That’s because there is less of a chance that you’ll die and force a payout from your insurer. Because insurers are taking on less risk, they will charge you less.

The same holds true if you are healthy. The healthier you are, the less you can expect to pay in life insurance premiums. For instance, if you are not overweight, your premium will be lower. You’ll pay less, too, if you don’t smoke.

But you’ll pay more for life insurance if you are a man. That’s because insurers consider men to be at a higher risk to die, forcing them to make a payout.

Health Insurance Premiums

Many people get their health insurance from their employer. If that’s the case for you, the amount you’re responsible for paying for this insurance will be deducted from your paycheck automatically. You’ll still be paying premiums, you just won’t have to send in the actual payments.

If you don’t get health insurance from your employer, you’ll have to pay your premiums on your own, according to the payment schedule set up by your insurance provider.

One way to reduce your health insurance premiums is to choose an HMO plan instead of a PPO. With a PPO, you can see any doctor you want without first getting a referral. With an HMO, you work with a main primary care physician who then provides you with a referral to any other medical specialist you need to see. You have less choice with an HMO plan, which is why these plans are less expensive and come with lower premiums. You can also opt to enroll in a health savings account.

Your health insurance premiums will be lower, too, if you choose a plan with a higher deductible. Make sure, though, that you can afford to pay that deductible before choosing such a plan.

Renters Insurance Premium

If you rent a home instead of owning, you’ll need renters insurance. This insurance helps pay to replace the items inside your apartment or unit when they are destroyed or damaged.

You might think you can skip the cost of paying renters insurance premiums, thinking that your landlord will cover damages. This is a myth. Your landlord is responsible for repairing damages to the building itself, not your unit.

If your upstairs neighbor’s pipe bursts and floods your apartment, your landlord is responsible for fixing that pipe. Your landlord would also be responsible for repairing your apartment unit’s damaged ceiling. Your landlord, though, isn’t responsible for paying to replace any furniture or appliances that were damaged by the water flooding into your unit.

Understanding Insurance Premium Fluctuations

Your insurance premiums can fluctuate from year to year, rising or falling depending on a variety of factors.

Maybe you were in a car accident last year, forcing your insurer to pay out to cover the damages to your vehicle. If so, your auto insurance premium will rise. Maybe you lost 30 pounds and reported it to your life insurance provider. You might be able to negotiate a lower premium. If you added living space to your home, your homeowners’ insurance premium might rise.

Sometimes insurance premiums rise because of variables outside your control. Your health insurance provider, for instance, might determine that the cost of providing coverage to its customers has increased. To make up for this, your insurer might boot your health insurance premiums.

How To Get The Lowest Insurance Premium

The best way to nab the lowest premiums on any insurance policy is to shop around. That’s because the premiums charged by insurers can vary. Fortunately, it’s easy to shop policies today. You can do much of the work online, visiting the sites of insurers that cover your area, entering basic information and requesting a quote.

Just be aware that a final quote from these insurers might vary from the online estimate. That’s because insurers need to verify certain information about you to provide you with the most accurate proposal. Life insurance providers, for instance, will need to conduct a brief medical test to determine your health. Auto insurers might check your credit history before providing you with a final estimate on your premium.

After you receive quotes from insurance companies, make sure to study carefully exactly what coverage each insurer is offering. An auto policy might seem like a bargain, but if it doesn’t provide the coverage you need, it could hurt you financially should you suffer an accident.

The extra work of shopping for a policy is worth it. You don’t want to overpay for your insurance coverage. Comparing policies is the best way to avoid this.

For more tips on reducing your insurance premiums, visit our personal finance learning center or create a Rocket Accounttoday.

1Rocket Account is your account created in connection with Rocket Mortgage®, Rocket Loans®, Rocket HomesSM or Rocket HQSM. Rocket Mortgage®, Rocket Homes Real Estate LLC, Rocket Loans® and Rocket HQSM are separate operating subsidiaries of Rock Holdings Inc. Each company is a separate legal entity operated and managed through its own management and governance structure as required by its state of incorporation, and applicable legal and regulatory requirements.

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Dan Rafter

Dan Rafter has been writing about personal finance for more than 15 years. He's written for publications ranging from the Chicago Tribune and Washington Post to Wise Bread, RocketMortgage.com and RocketHQ.com.