Ever wonder why you’re paying the premium you’re paying?
It’s not arbitrary. Read on to take a peek into some factors that can determine the amount you’ll pay.
An insurance company issues contracts that provide coverage in the form of compensation due to a covered financial loss in exchange for premium payments. Insurance companies use statistics and probability projections to determine how much money someone should pay based on the probability that person will make an insurance claim. Those more likely to make a claim are typically required to pay a higher premium.
How insurance works
The concept itself is relatively simple: bad things happen sometimes and people want to avoid financial ruin that could arise from those bad things. To maintain peace of mind, or sometimes by law, people will obtain insurance to reduce the risk of ruin. People also use insurance to “make themselves whole” again after financial issue, such as a car accident or the loss of income.
All those who want to obtain insurance apply to be part of a pool. The insurance company then calculates how many people are in the pool, how much money they’ll probably need to pay insurance claims, then calculate each individual’s risk to the company.
Which factors affect premiums
Which factors affect premiums vary widely across insurance types. Driving style and vehicle value are obvious determining factors in car insurance. But so are other factors you may not be able to change, like location: those who commute to work spend more time in their cars and thus increase the probability of having an accident, simply for being in the car longer.
Health and life insurance focus on healthy lifestyles. If you’re more likely to live longer and require less medical attention, the lower your premiums. Renters and homeowners insurance consider the value of the property and the contents therein. Insurance plans will also vary based on the amount of coverage they offer. If your fire insurance only covers $2,000 worth of possessions, all things being equal, you’re probably going to pay a lower premium than someone who wants $20,000 of coverage.
Reducing your premiums
To avoid frequently making lower-risk members pay for the claims of higher-risk members, not everyone is thrown together in the same pool. If you can adjust your personal risk factors so that you’re entered into a different pool, you might see substantial reductions in your insurance premium. Your insurance company or agent should be able to help you identify which factors you score high for in riskiness so you can try to reduce your costs.
For example, if you smoke, quitting may greatly reduce your premiums (although you may have a waiting period like 12 months after you quit in order to qualify as a non-smoker). If you have several speeding tickets, ask how much a driving school certificate might help reduce your premiums.
The takeaway here is that your riskiness is based on a quantification of factors and the probability that any one of those factors will trigger a claim. Changes you can make in your lifestyle may add up to significant savings with your premiums, so it’s worth looking into!