What Is an Insurance Premium?

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  • What Is an Insurance Premium?

When you’re shopping for any kind of insurance (homeowners, renters, auto, etc.), one of the most important things you should be looking for is each different policy’s premium. The insurance premium has to do with how much money you have to spend, so you’ll want to learn as much about it as possible. Luckily, it’s a pretty easy concept to grasp. 

What Is an Insurance Premium?

An insurance premium is basically how much you have to pay for an insurance policy. It means the same thing as insurance rate, insurance price, or insurance cost. When you pay a premium, you’re buying insurance coverage for your home, car, and/or belongings depending on the type of insurance.

How Do Insurance Premiums Work?

When an individual or business signs up for an insurance policy, they agree to pay a certain premium, aka price, in exchange for coverage for as long as the policy lasts. Policies usually last for a year at a time, and after that, you can choose to renew and pay the premium again to extend that coverage for another year. 

Insurance premiums vary from person to person and insurance company to insurance company. Each insurance company has its own method of calculating premiums, but the formula is usually based on factors such as where you live, the age and size of your home, your driving record, your claims history, your credit score, and what kind of coverage you want. 

Because premiums are so specific to each policyholder, you and someone else might pay very different amounts for the exact same coverage from the same insurer. 

Who Pays for an Insurance Premium?

The policyholder, aka the primary person whose name is on an insurance policy, is responsible for paying the premium. Even if you add other people to your insurance – such as additional drivers on your car insurance or members of your household on your homeowners insurance – your insurance company will hold you accountable for the premium if you are the policyholder. 

If you fail to pay your premium, your insurance company can (and likely will) drop you, and you’ll no longer have coverage.

Do You Pay for Insurance Monthly or Yearly?

You’ll usually get to choose how often you pay your insurance premium. You can pay the full amount upfront yearly or break it up into smaller installments that you pay throughout the year. Your insurance company might allow you to pay installments monthly, quarterly, or every 6 months.

Some insurance companies offer a discount for people who pay the full premium upfront each year. Other insurers might require that you pay the total amount upfront, especially if you have a history of failing to pay your insurance bills.  

Average Insurance Premiums for Major Policies 

As we already covered, insurance premiums vary immensely from person to person. That being said, these national average insurance premiums can give you a general idea of approximately how much you might spend on insurance:

  • Average homeowners insurance premium: $1,000-$3,000 per year or $80-$250 per month 
  • Average auto insurance premium: $300-$2,000 per year or $25-$170 per month
  • Average renters insurance premium: $100-$400 per year or $8-$35 per month
  • Average condo insurance premium: $300-$1,000 per year or $25-$85 per month
  • Average flood insurance premium: $700-$1,500 per year or $60-$125 per month

Keep in mind that you’ll pay more for insurance if you have a higher risk of filing a claim and getting money from your insurance company. For homeowners insurance, higher risks include things like living in a natural disaster-prone area or having an older home. For car insurance, higher risks include things like being a new driver or having a record of car accidents

Another major factor affecting insurance premiums is how much coverage you purchase and the type of coverage. For example, full auto insurance coverage costs more than you would pay for the minimum liability coverage. Similarly, a home worth $500,000 will cost more to insure than one worth $250,000. 

What Is an Endorsement Premium on Homeowners Insurance?

An endorsement is extra coverage you can add to your homeowners insurance policy to increase your coverage limits or otherwise alter your policy. Because endorsements add more coverage, they also cost extra. An endorsement premium is how much you would have to pay for a particular add-on.

Insurance Deductible vs. Premium

Insurance deductibles and premiums both have to do with money coming out of your pocket, but they’re not the same thing. When you make an insurance claim, your deductible is the amount you have to pay out-of-pocket before your insurance will kick in. 

For example, say your homeowners insurance deductible is $1,000. If you make an insurance claim for $7,000, your insurance will only pay $6,000 because you have to pay that $1,000 deductible on your own. In this case, you wouldn’t be able to make a claim for anything less than $1,000. 

How Insurance Premiums and Deductibles Affect Each Other

Insurance premiums and deductibles are often directly connected. If you want a lower premium, you can set a higher deductible. The opposite is also true: If you want a lower deductible, meaning you pay less in the event you have to make a claim, you’ll have to pay a higher premium in exchange.

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The editorial content on Clovered’s website is meant to be informational material and should not be considered legal advice.