When people sign up for insurance, they pay a premium. A premium is the amount of money someone pays for insurance coverage for a specific period. This period is typically for a year.

The premium amount depends on what type of insurance people are seeking and their individual circumstances. Underlying factors such as age, gender, marital status, occupation, and health history all impact the premium amount.

How Premiums are Calculated?

Insurance companies determine an individual’s expected risk, meaning how likely they are to file a claim. The higher the risk, the higher the premium. Insurers assess several factors when deciding the premium amount. Here are some of these factors:.

The age and gender of the individual
Occupation
Smoking status
Health history
Location

Here’s an example. Suppose a 25-year-old man living in a low-crime area with a clean medical history applies for a term life insurance policy.

An insurer may issue him a policy at a lower premium rate than a 45-year-old smoker with a history of cancer. The reason being that the 45-year-old is a higher risk (based on the factors listed above), so they have to pay a higher premium to provide coverage.

One important thing to note is that insurance premiums are not solely based on the individual’s expected risk. Companies also consider their costs when setting the premium.

In other words, they need to charge a high enough premium to cover their expenses and have some profit left over. The expenses include paying claims, investing, and administrative costs.

Common Types of Insurance Premiums

Insurance policies have different methods of premium calculation, depending on the type of coverage. Here are some of the most common types:.

Health Insurance Premiums

Health insurance premiums are based on the level of coverage an individual chooses; this can range from a basic plan that offers minimal coverage to a comprehensive plan that covers more services.

Premiums for this type of coverage can also be affected by the size of a person’s family and their income.

Life Insurance Premiums

The premium of a life insurance policy is determined by the individual’s age, medical history, height, weight, and lifestyle choices.

The older an individual gets, the more expensive the premium becomes since they are more likely to need the policy payout soon. This is why many people purchase life insurance when they are young and healthy.

Auto Insurance Premiums

Auto insurance premiums are determined by a few factors, such as the individual’s driving record and age. The older an individual is, the more experience and responsible driving they have; this can lead to a lower premium.

On the other hand, a person with a history of several accidents or moving violations will end up with a higher premium than someone with a clean record.

Why Do Premiums Increase?

Market trends, inflation, and unexpected events can lead to changes in premium rates. Insurers also may raise premiums when they incur higher expenses. Here are a few reasons why premiums increase:.

Increasing Healthcare Costs

Healthcare costs in the US continue to rise. Health insurance premiums are increasing due to inflation and the rising cost of medical procedures and prescription drugs.

Changes in Risk

Insurance companies regularly reassess their risk exposure. Any changes in the level of risk can lead to higher premiums. For example, a natural disaster such as a flood or wildfire may lead to home insurance rates going up in the affected area.

Increased Claims

Insurers base premiums, in part, on the expected number of claims. When more claims are filed than anticipated, a surplus premium of the company may get depleted. Therefore, the insurance company must raise the premium rates to rebuild their surplus.

Investment Income

Insurance companies use the premium money collected to invest in securities in anticipation of future claims. If the investment returns are lower than forecasted, the company can raise premiums to cover the gap.

Regulatory Changes

Changes to insurance laws and regulations can also lead to changes in premium rates. For example, if the government mandates certain coverages that insurers must include in their policies, the premiums may rise to cover the added cost.

The 12% Increase

According to a recent report from the National Association of Insurance Commissioners (NAIC), the average annual premium for car insurance in the US in 2020 was $1,202. This is a 4.1% increase compared to the previous year.

However, it’s essential to note that many drivers experience rate increases way beyond the average. One of the recent large national insurance carriers, for example, increased rates by more than 12% on average in 2020.

Typically, companies raise their premium rates minimally, little percentages at a time. These small increases can add up over time.

But, if your premium increases by more than expected, it’s crucial to reach out to your insurance agent to ask why it has increased so drastically. Something else could be going on behind the scenes, or it could be time to shop around for a better insurance quote.

Conclusion

Premiums differ by insurance coverage, an individual’s circumstances, and the insurance company’s pricing strategy. Insurers look at factors like age, gender, location, occupation, and health status to calculate premiums.

Premiums can increase due to rising healthcare costs, changes in risk, increased claims, investment income, and regulatory updates. If you experience a higher than expected increase in premium, it’s essential to contact your agent for clarification or shop around for another insurance policy.