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How Do Premiums Work?

Whether you are new to purchasing insurance or simply want to know more about an existing policy, insurance premium is a phrase you need to know. An insurance premium is the amount of money you will pay the insurance company to purchase your desired policy. Insurance premiums can fluctuate depending on many factors, including the type of insurance purchased, your location and your personal history. It may be possible to lower your premiums through certain actions and efforts, such as comparing insurance quotes or switching companies.

Types of Insurance Premiums

The average person pays for more than one insurance premium. Different types of insurance policies cover different incidents, ranging from auto collision repairs to wage replacement after suffering a disability. Every type of insurance requires policyholders to pay premiums. A premium could either be a one-time annual fee or a monthly payment depending on the chosen payment plan. The premiums you might pay depend on the types of insurance you need to purchase.

  • Car insurance. Every driver in Arizona has to pay for auto insurance. The average car insurance premium in Arizona is $843 per year. A car insurance premium could increase if the policyholder gets into an accident, receives a traffic ticket or moves to a more crash-prone area.

  • Homeowners insurance. Homeowners insurance pays for property repairs after something damages a home, such as a fire or flood. The price for homeowners insurance will depend on the size and build of the home, how old it is, its location, and whether it has had any recent upgrades.

  • Life insurance. A life insurance plan can provide financial compensation for surviving loved ones after your death. It may also help pay for funeral and burial costs. What you pay for your life insurance premium will depend on personal factors such as your age, health, medical history, job and whether you smoke.
  • Health insurance. Health insurance premiums come in addition to payments you must make out of pocket during the appointment or to purchase prescription medications. The higher your health insurance premium, the lower your deductibles for health care, in general. A health insurance premium can change year by year.

  • Disability insurance. If you suffer a disability that takes you away from work for at least 90 days, disability insurance could kick in to pay for your lost wages. The costs of disability insurance average between 1% and 3% of your salary depending on your health, occupation, age, location and coverage amount.

Most insurance companies offer a base premium, then add to or subtract from it according to your unique information. The type of insurance you choose will affect your premium. If you wish to have better coverage, you will need to pay more monthly or annual costs for that coverage. Limiting your coverage to the bare minimum will minimize your premiums; however, if an accident happens, you may end up paying more out of pocket to recover your losses.

Can You Reduce Your Premiums?

Insurance companies gauge premium prices on several factors, but the main question it will ask is whether you are a risk to the company. If you appear to be a risky investment for the insurance company – such as a driver with a history of several auto accidents – the company will increase your premium to counteract the risks it is taking to insure you. The lower your risk as a policyholder, the lower insurance companies are willing to price your coverage.

Many insurance companies offer ways in which policyholders can lower their insurance policy premiums. Car insurance companies, for example, may offer good student discounts for young drivers or discounts when policyholders bundle their vehicle and home insurance plans together. The best way to get the lowest price, however, is to shop around. Different insurance companies may offer more competitive rates for the types of insurance you wish to purchase.