What Is an Insurance Premium?

An insurance premium is the price a person or business (the insured) pays for an insurance policy. Insurance premiums are paid for all types of insurance: healthcare, rental, accident, auto, home, life, and more.

How an Insurance Premium Works

The premium is the price charged by the insurer, an insurance company, for providing insurance coverage.

Premiums are revenue or a source of income for the insurance company. Premiums can be due monthly, quarterly, annually, or on a special timetable that the insured agrees to. Failure to pay the premium may result in the cancellation of the policy and loss of coverage.

Insurance Premium Example

The amount of the premium is determined by the kind of insurance coverage you are buying and the risks of insuring you.

For example, a car insurance premium will depend on where you live, your driving habits and record, the car and its safety features, and any other factors that affect the insurer’s risk of insuring your car. Location and use are the biggest factors affecting car insurance premiums.

The features of your coverage, such as the deductible and limits on your coverage, will also affect the premium. 

Insurance Premium vs. Deductible

A premium is the price of the insurance you’ve chosen, charged by your insurance company. A deductible is an amount you have to pay before your insurance company initiates coverage.

For example, if your car insurance premium is $800 per year, you must pay your insurer $800 per year to have the insurance. if your car insurance has a $100 deductible on collision, and you have collision damage of $500, you will have to pay $100 of the damage and your insurer covers the remaining $400. 

Premiums apply to all insurance policies. Deductibles vary by plan—some plans have no deductible—though those often come at a higher premium. Deductibles are common in health insurance and auto insurance plans.

How to Find the Lowest Insurance Premiums

As with most goods or services, shopping around is the best way to find the lowest insurance premiums. There are many quote aggregation services online that will allow you to review dozens of offers from insurance companies.

The sites typically require some basic information such as your name, date of birth, address, and income, along with the personal information of anyone else in your household. You can choose from a number of options available based on your home state—each with different features such as premiums, deductibles, and copays. Of course, you get what you pay for: the policy coverage changes based on the amount you pay.

Insurance agents or brokers also sell insurance. A broker works with a number of different insurers and can try to get you the best quote: essentially the in-person version of a website aggregator. Just as some websites might be sponsored by a certain insurance company, some agents may equally be motivated by commissions from certain companies.


How Insurance Premiums Are Used

Insurance companies use the premiums collected from customers to cover payouts on the policies they underwrite. This method of risk sharing allows people to be insured, and to be able to afford losses to assets by sharing the risks with insurance companies. 

Purchasing an insurance policy is an important process that shouldn’t be taken lightly. Your newly leased car, for example, may require a certain amount of financial protection. It’s best to base the insurance you purchase on the required amount of coverage you need, not the cost of the policy premium. 

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Rachel Siegel, CFA
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Rachel Siegel, CFA is one of the nation's leading experts at ensuring the accuracy of financial and economic text.  Her prestigious background includes over 10 years creating professional financial certification exams and another 20 years of college-level teaching.

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