What Are Insurance Premiums and How Do They Work?

An insurance premium is an amount an insurance company will charge you for the mere pleasure of purchasing one of their insurance policies! The calculation of an insurance premium will vary significantly from person to person to consider differing factors. Premiums are typically centered around personal information, your location and any other specific determined information. Discounts or preferred rates are then added to the premium.

The Four Factors Which Can Determine Your Premium

There are four common factors which can determine your premium ranging from cover type and amount, personal information and insurance industry competition.

  1. The Amount of Coverage You Require:
    Understandably, the higher amount of coverage you require, the higher your insurance premium will total. This rule applies to all types of insurance coverage.
  2. The Type of Coverage That You Require:
    Once again, the more coverage that you require, the more you will be charged for your premium. There are different options offered on all insurance types from basic to fully comprehensive.
  3. The Personal Information You Impart:
    Every insurance company will utilize a different rating criterion to calculate your premium. This calculation will tend to include such information as for where you live, your insurance history and several other factors regarding your lifestyle.
  4. The Competition in The Insurance Industry:
    A somewhat unusual concept but if there is a specific market segment that an insurance company wants to attract, they can stray from their usual rates to attract this new business.

What Happens to Your Insurance Premiums?

Ultimately, all insurance premiums are collected and collaborated and are used as liquid assets to pay for claims. When these premiums exceed more than what they will have to pay out in costs for that year, alongside fees and other expenses, the insurance company have then made themselves a profit.