Understanding Insurance Premiums - What to Know Before Choosing a Policy

What is an Insurance Premium? The experts at Lines Insurance explain…

What is an Insurance Premium?

An insurance premium is the amount of money one pays for an insurance policy or coverage.  Essentially, your premium is the cost of your insurance.

Insurance carriers use the law of large numbers to estimate losses and spread the cost amongst a large number of customers.  

How Much do Insurance Premiums Cost?

An insurance premium will be more or less expensive depending on the type of coverage you are looking for, as well as the risk as estimated by the carrier. 

Independent agents who represent multiple carriers have the advantage of being able to shop your needs with multiple companies by finding one most interested in writing your potential risk, in order to find you the best possible policy.

Insurance premiums are calculated by weighing a number of factors including the type and scope of coverage and the risk being assumed by the carrier

Calculating Insurance Premiums

Believe it or not, there is a rhyme and reason to these calculations!

Most carriers utilize a matrix with some combination of the following factors:

  • Age

  • Location

  • # of Policies with a Particular Carrier

  • Insurance Score (Credit)

  • Claim History

  • Comprehensive Level of Coverage

  • Paperless Document Deliver

  • Payment Method

  • Prior Insurance Information

In addition to these standard items, there are many other things insurance companies may take into account depending on the specific to the type of policy:

Home Insurance Premiums

  • Reconstruction / Dwelling coverage

  • Age of home

  • Construction Materials

  • Security Features (Monitored Alarm, Sprinklers, etc.)

  • Options Endorsements (Water Backup, Ordinance & Law, Scheduled Items)

  • Liability Limit

Auto Insurance Premiums

  • Driving record (usually 3 years prior)

  • Type of Vehicle(s)

  • How far you Drive / Willing to use Monitoring Telematics

  • Liability Limits

  • Endorsements (Road Side Assistance, Rental Car Coverage, Original Manufactures Parts, Accident Forgiveness) 

Life Insurance Premiums

  • Age

  • Type of Policy (Permanent vs Term, Cash Value or No)

  • Build (Height & Weight)

  • Health History

  • Endorsements (Child Rider, Long Term Care, Spousal Rider)

  • For Term policies the length of the term

Business Insurance

  • Type of Business

  • Annual Revenue

  • Payroll

  • Job Duties of Employees

  • Type of Coverage Needed (Liability, Property, Auto, Workers Comp) 

Deductibles vs. Premiums

Many customers confuse these two terms, but they are NOT the same. As explained above, premiums are the annual costs to hold your insurance policy. Deductibles, on the other hand, are how much you are willing to pay before your insurance kicks in.  The higher your deductible the more risk you are taking on therefore the lower your insurance premium.  

Why do Insurance Premiums Change?

Insurance Premiums most commonly change on policy renewal dates.  Carriers also take rate increases from time to time to account for changes in loss trends.  This could be things like lots of losses in a particular zip code, or a large number of weather related incidents impacting property policies.  Cost of repair, so when mechanics are charging more or the cost of building materials increase, can also be a factor insurance companies will take into consideration.

Individual factors are also usually assessed at renewals.  A new ticket / accident / claim could cause an increase. Improved credit score or a youthful driver getting older could lead to a rate decrease.  

Improving your credit score can lower your insurance premiums

Credit Score

Did you know that someone with a better credit score is less likely to have claims? 

Different states allow carriers to utilize this type of rating on different products.  Some carriers put more weight behind credit as a factor. MD currently allows carriers to use a credit based score for auto insurance but not property.  Bottom line, better credit leads to lower prices with the belief that indicates you will have less claims.  

How to Get a Low Insurance Premium

  • Work with an agent you trust

  • Complete an insurance review with your agent annually.  You would be amazed by how often things change.  

  • Independent agents have the advantage of utilizing multiple carriers on your behalf.

  • Remember that cost is an important part of your insurance package, but the cost of not having the correct coverage can be even greater.  The value of your package for many people is often more important than always getting the lowest cost.