The term “premium” is one of the most common terms you hear when talking about insurance, yet not many people what it actually means. This guide will explain what a premium is clearly and efficiently.
What Is a Premium?
A premium is the amount you pay regularly to keep your insurance active. Premiums are usually monthly payments, but some insurance plans allow quarterly (4 times a year) or yearly payments.
If you stop paying your premium, your insurance will stop covering costs. So, you got to pay it.
Why Do Premiums Exist?
Premiums exist for multiple reasons, the main reasons being:
- Keeping your insurance coverage active
- Helping insurance companies manage risks
- Allowing insurers to pay claims for everyone in a plan
If premiums didn’t exist, you would be paying your medical bills in full, because insurers would have no way of helping you.
What Affects Your Premium?
- Age: Younger or older affects cost. For instance, health insurance for older people is usually more expensive than for younger people, and car insurance for younger drivers often costs more than for older drivers.
- Health status: If insurers think you’re likely to need medical care, your premium might be higher. If they think you won’t need much care, your premium can be lower.
- Driving record: If your record is clean, you’re likely to be offered a lower premium, whereas if you’ve had several accidents, your premium will be higher.
- Location: Different areas have different circumstances, such as healthcare costs, accident rates, crime levels, and whether the area is urban or rural.
- Deductible amount: If your insurance’s deductible is high, then your premium would be low (high deductible → low premium.)
- Coverage level: The more services your plan covers, the higher your premium becomes.
- Type of plan: Some plans’ premiums are naturally higher or lower than others.
Example: How a Premium Works
Your health insurance premium is $150/month. You pay it every month to keep your insurance active. Even if you don’t use insurance that month, the premium still applies.
How to Lower Your Premium
Lowering your premium is quite easy, but your best choice depends on your needs. Here are ways to lower your premium:
- Choosing a high deductible. If you don’t use your insurance very often, this is a great choice for you.
- Improving your driving record. For car insurance, being a driver with little to no accident means you don’t use insurance often, which results in a lower premium.
- Selecting a plan with fewer coverage services. Plans that offer fewer coverage services tend to be cheaper. If it suits your needs, this is also a nice choice.
Remember, a lower premium means you pay more out of your pocket when you do need care.
Types of Premium Payments
Most companies let you choose how you pay for your insurance. The most common option is monthly payments, but some companies offer quarterly (four payments each year) or yearly payments. Paying yearly is usually cheaper because insurers may offer small discounts for staying with them for a whole year.
Why Premiums Matter
Your premium keeps your insurance active. Your coverage stops if you stop paying it, and the insurer won’t help with costs anymore. Paying your premium on time ensures you stay protected when you need it. Before trying to lower your premium, think about how often you use your insurance. If you use it a lot, then a higher premium is the better choice. This is because a higher premium can actually save you more money in the long run, since lowering it usually means raising your deductible.