How does the insurance company determine my premium?

Everybody needs insurance, but not everyone understands how insurance companies calculate their premiums. Whether it’s life, home, health, or car insurance, companies use a standard formula to calculate how much you’ll pay for your coverage.

That won’t help you feel any better if you’re receiving insurance rates that you think are too high. However, your rates are determined by the same set of factors as other customers, including your age, gender, and other criteria.

If you’ve been wondering, How do I determine my premium?, the best place to start is to shop around for quotes. No matter what type of insurance you need, you can enter your ZIP code into our free tool to determine what quotes might look like for you.

What is an insurance premium?

You’ve probably heard the term “insurance premium,” but it’s not always clear what that means. Simply put, an insurance premium is the amount that you pay for your coverage.

Depending on your policy and your personal choice, you can usually make your insurance payments in monthly installments or large sums. Most policies will let you pay for either six months of coverage or an entire year.

If your insurance history is poor — meaning you’ve struggled to make payments on time in the past — you might have to pay for your entire policy up front before a company provides you coverage.

There are typically several ways to pay your insurance premium, including traditional payments with checks, cash, or debit cards. You can generally use your credit card, too, particularly if you’re paying for the entire year.

You can also pay online or through mobile apps. Not every company offers those methods, but most big insurance companies do. You can earn a discount on your premium by signing up for paperless payments or by making one large payment instead of small monthly installments.

How much do insurance premiums cost?

Are car insurance rates negotiable? Many people find themselves asking this question since insurance rates can seem quite random.

There is no one set cost of an insurance premium, no matter what type of insurance you’re purchasing. If you and your neighbor lived in the same house model, one of you would likely pay more for insurance than the other, even if you buy the same coverage.

The best way to find the greatest insurance premium is to compare prices from different companies. However, a general rule of thumb is that you’ll pay more for better coverage. A simple example to understand this is the price of your deductible. The smaller your deductible, the higher the cost of your insurance.

However, the price of your insurance isn’t the only consideration for coverage. While you can certainly select the most affordable option, you’ll likely miss out on valuable coverage. Not having enough coverage could cost you a lot more than you save if you ever need to make a claim.

How to Calculate Premiums for Insurance

While every insurance type and company are different, there are some common factors that all providers will consider. However, when you contemplate how to calculate an insurance premium, formulas change from company to company. You’ll want to obtain direct quotes to determine exactly what you’ll pay.

Here are the common factors each of the most common types of insurance consider for your premium.

Car Insurance

Car insurance companies will look at a variety of factors to determine your premium. The components that establish your premium include the following:

• Your age – Adult drivers tend to have more experience on the road and engage less in risky behavior. Young drivers will pay much higher rates.
• Your gender – Insurance companies have detailed numbers regarding those who makes claims. Statistically, men are more likely than women to get into accidents and engage in poor driving habits, making them more susceptible to file a claim. Keep in mind, some states have outlawed the practice of changing premiums based solely on gender. 
• Credit history – Simply put, insurance companies base their trust on your ability to pay for your insurance according to your credit score. Again, some states have made it illegal to use credit score to determine car insurance rates.
• Marital status – You can qualify for lower rates, combined auto, and other discounts when applying for auto insurance as a married person, which could lead to significant savings.
• Driving record – If your driving history is clean, you’ll pay less. However, your insurance will be much higher if you have accidents, speeding tickets, or DUIs.
• Your location – Some areas are at a higher risk for cars, such as locations where there is more animal contact or car theft. Additionally, some zip codes have higher claims, meaning you’re more likely to cost your insurance company money.
• The make, model, and year of your car – Some cars are safer than others, and some are less likely to get pulled over. Additionally, vehicles that cost a lot to repair can be accompanied by higher premiums. Things like replacement cost, safety ratings and features, and more get rolled into one calculation that determines the effect your car has on your premiums.

As you can see, determining how to calculate a premium percentage is complicated. These are the most basic factors, too — there may be many more, depending on the company.

Homeowners Insurance

You might think that homeowners insurance is less complicated than car insurance, but that’s not necessarily true. Here are some of the top factors that comprise homeowners insurance:

• The price of your home – If something happens to your house, your insurance will have to pay for it. The more it costs to rebuild your home, the higher the price of your insurance.
• Your location – Probably the most significant factor of home insurance is your location. Weather plays a big role here — flood zones, tornado and hurricane risk, and earthquake damage all reflect your price.
• The condition and age of your home – Many homeowners insurance providers will require a 4-point inspection to assess the financial risk of your home. Older homes cost more to insure because they are more likely to have issues.
• Security features – Fire alarms, burglar alarms, safety screens, window alarms — these are all great features to keep you safe. You’ll probably earn a discount on your insurance for having them, too.
• Credit score – Like car insurance, a home insurance company will base their trust in your ability to pay them according to your credit score.

There’s more than the physical aspect of your home that establishes the price of your insurance. Insurance companies place different levels of importance on each factor, which is why it’s integral that you compare quotes.

Health Insurance

Health insurance focuses mostly on you, though there are other factors they’ll consider. These additional components to contemplate include the following:

• Your age – Similar to car insurance, age plays a big role in your premiums. However, health insurance charges less for young people since they are less likely to have health issues.
• Location – The difference in premiums, due to location, mainly derives from local state laws rather than any health-related reason.
• Tobacco use – If you smoke, chew, or use any other type of tobacco, you’ll likely pay 50% more for your health insurance.
• Enrollment size – Some people have individual plans, but you’ll pay more if your entire family is on your plan. However, group insurance is more affordable than individual plans for everyone in your family.

Due to federal law, health insurance companies are unable to charge men and women differently. They also can’t use your medical history or current health status to set your premium.

Life Insurance

As the final main insurance product, life insurance is an essential aspect of protecting your loved ones in the event of your death. Companies carefully consider the following criteria before establishing your premium:

• Your age – Perhaps the most important aspect in life insurance premiums is your age. The younger you are when you sign up for a policy, the less your premium will be.
• Your gender – Unlike health insurance, life insurance companies can charge men more for a policy since women statistically live longer.
• Health history – If you have a medical condition that will likely shorten your life span — like cancer or diabetes — you’ll pay more for insurance.
• Family history – You could have a clean bill of health, but if serious medical conditions run in your family, like cancer or heart disease, you’ll pay more.
• Tobacco use – It’s a well-known fact that tobacco use shortens your life span. Your insurance premium will always be higher than that of a non-smoker.
• Occupation and hobbies – People with high-risk jobs — such as any of the most dangerous jobs in America — or those who partake in perilous hobbies, like sky diving, can expect higher premiums.

Life insurance companies require more than an application to obtain a policy — unless you’re getting something similar to a guaranteed issue plan. You’ll need to answer medical questions in an interview and possibly do bloodwork.

Find the Best Insurance Premiums for You

Understanding how to calculate premiums for general insurance is complicated. However, if you have questions about your rates, you can always ask your agent to break down the cost for you.

If you’ve been trying to figure out how to determine your premium, comparing insurance rates is a great place to start. Enter your ZIP code into our free tool to discover what rates might look like for you.