Insurance plays a vital role in protecting us from financial disaster. When the worst things in life happen, insurance can be there to pay for our new car, rebuild our homes, give lump sums to our loved ones, and much more.
However, for those not used to the world of insurance, there are a few terms that can be a little confusing. Here we’ll look at exactly what is an insurance premium, how it is calculated, and how to manage it.
What is an Insurance Premium?
Simply put, an insurance premium is the amount of money that you pay to an insurance company for the coverage they provide. This could effectively be called your insurance payment, and you need to keep up with these payments as outlined in your policy.
These premiums can be paid in a few different ways, with the most popular being monthly. However, they often paid quarterly or as a one-time payment, usually for a year of coverage. You usually have control over when and how the premium will be paid, following an agreement with your provider.
How Are Insurance Premiums Calculated?
These days, insurance companies use complex algorithms to calculate the premiums they charge. The different factors (such as age) that go into these algorithms can vary in importance depending on the type of insurance you are looking for.
These algorithms are used to assess risk. If an insurance company sees you as having a higher risk of claiming on the policy, the more you’ll pay. For example, younger drivers statistically have more car accidents and therefore have higher auto insurance premiums.
Key Factors Affecting Insurance Premiums in Canada
There are many different factors that go into insurance premiums. The most obvious is the type of insurance you are looking for. For example, life insurance for a 20-year-old is going to be much cheaper than auto insurance for the same person.
Regardless of the type of insurance you’re looking for, let’s take a look at the other main factors that will affect your premium.
Coverage Amount – The coverage amount is what the insurance company will pay out should a claim be made. For example, a life insurance premium with a $500,000 payout is going to be more expensive than one with a $250,000 payout.
Policy Limit – This is similar to the coverage amount but is the maximum an insurance company will pay out for. For example, if you have a policy limit of $1 million on homeowners insurance, they will only pay out up to this limit.
Personal Information – Personal information such as age, location, gender, and health status will affect the premium. For example, someone with diabetes is going to pay more for life insurance than someone with a clean health record.
Driving Record – For auto insurance, your driving record is going to be crucial. A clean driving record will result in lower premiums. If you have a history of tickets, accidents, and convictions, then your costs will be increased.
Claim History – Whatever the type of insurance, if you make frequent claims then you’re going to be perceived as a higher risk. And as we’ve mentioned, the higher the risk you are, the more you’re going to pay.
Deductible – The deductible is the amount you have to pay out of pocket before your insurance kicks in. The higher the deductible, the lower your insurance will be but the higher your financial responsibility if you need to make a claim.
How to Reduce Your Premiums
There are several ways to reduce your insurance premiums with the most effective being to compare quotes from multiple insurers as they will all assess risk differently. A great trick is to contact a broker, as they can do the hard work of contacting insurers for you.
Another way is to combine policies with the same insurer, such as home insurance and auto insurance as this can give you a lower overall cost. Improving your risk profile is also a good idea, such as maintaining a clean driving record for auto insurance or stopping smoking for health-based insurance.
Other ways include increasing your deductible, maintaining a good credit score, looking into discounts, lowering your coverage amount, and avoiding small claims. It’s always important to remember the first quote you receive is unlikely to be your best one.
Other Policy Terms Explained
Now we know all about what insurance premiums are, let’s look at some other policy terms that you may come across that we’ve not yet covered.
Policy – The contract between you and the insurance company outlining the terms and conditions.
Policyholder – This is the person (such as you) that owns the insurance policy.
Beneficiary – The person(s) designated to receive money from the policy.
Coverage – The collective term for the protection and benefits provided by the policy.
Exclusion – Situations or conditions that are not included in the policy.
Rider – Add-ons to the policy that aren’t standard.
Term – The length of the policy.
Underwriting – A risk assessment of a potential policy.
Final Thoughts
Hopefully, by now, you have a better understanding of not just premiums but also insurance as a whole. Knowing what these terms mean can make you feel confident about making financial decisions and protecting your future.
Here at Buckler Insurance, we’ll be happy to answer any other questions you may have about insurance. We can guide you through which insurance policies are perfect for your circumstances so give Buckler Insurance a call today to see how we can help.
