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What Determines My Insurance Premiums?

By Teri Dormer

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Insurance is a fact of life. At worst, it’s a monthly expense you can’t escape the moment you start to drive a car or move out on your own. But at its best, insurance can be a tremendous asset in your biggest time of need. 

Whether you like it or not, there’s no escaping the financial obligations of paying your monthly insurance costs. But with so much talk of getting the best deals and determining the best coverage, you might be wondering what actually determines how much you’re obligated to pay? 

Here’s a quick breakdown of what insurance premiums are and the premium factors you need to know about before you start shopping around for a better deal.  
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What Are Insurance Premiums?

By definition, insurance premiums are the annual rate you pay to insurance providers in exchange for a predetermined coverage policy. 

The insurance premium, or simply, the cost of your coverage, is typically billed in monthly, quarterly, bi-yearly or yearly increments. 

Insurance Premium Rate Factors 

The exact premium rate factors that determine how much money it costs to insure your vehicle or home are usually specific to the kinds of policies you enroll in.

A health insurance company may take certain factors, like preexisting health conditions, or an auto insurance company may take your driving record into consideration. Additionally, your home insurance policy takes your claims history and some personal factors into account. 

Generally speaking, there are four standard elements that help calculate the amount an insurance company will charge you for any type of coverage. 
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1. The Insurance Coverage You Enroll In 

Regardless of the policy, some elements of your insurance coverage are mandated by federal laws or the terms of sale for the purchase (including a car or a home) with which you’re facilitating. 

Still, some other elements of your insurance policy may be optional, and electing for additional coverage often drives the rate of your insurance premiums up.

As an example, all motorists are required to purchase liability insurance for their vehicles, but comprehensive insurance or medical payments may be elective levels of coverage you aren’t required to carry. 

As a general rule of thumb, the more comprehensive your policy is (that is, the more completely it covers you against any kind of loss), the more expensive it will become.  
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2. How Much Insurance Coverage You Need

Like the types of coverage you enroll in, the amount of coverage you need or sign up for can have a profound impact on your home or car insurance rates. Simply put, the more expensive something is, the more money it will cost to insure it.

By this same token, you have a little bit of control over the amount of money you pay for insurance by modifying the deductible associated with filing a claim.

Regardless of the claim type, all insurance policies include a deductible: the amount of money you’re obligated to pay out of pocket before your insurance company steps in to cover the expenses of your damage or loss.  

The higher you set your deductible, the lower your insurance premiums may be. From the insurance companies perspective, the more money you’re willing to cover in the event of an accident or loss, the less money they should be worried about having to provide for you.  
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3. Your Personal Demographic 

Unlike your policy type or coverage limits, there’s one aspect of your insurance premiums that you have little to no control over: how insurance companies grade you and your demographic. 

While not exclusive to this list, here is a sample of your personal information that the insurance companies typically take into consideration when determining how much money to charge you: 

  • Age
  • Gender
  • Credit score 
  • Professional occupation 
  • Insurance history or record 
  • Risk factor (typically on health or life insurance policies) 
  • Health history

When it comes to car insurance rates, insurance companies also take your personal driving history (including the kind of vehicle you drive and the number of accidents you’ve been in) into consideration as they determine your policy cost. 
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4. The Location You Live In

Where you live or operate can have a massive impact on your premium rates. If an insurance company is actively targeting your market, you may find coverage in your city or state significantly less expensive than in other parts of the country. 

Similarly, where you live may also determine the types of insurance you’re obligated to carry. If you live in a coastal area (or a flood zone), you may need to purchase separate flood insurance.

If you live in a part of the country plagued by wildfires, you may find comprehensive coverage on your home is more expensive than in areas where there are fewer concerns.

In either scenario, it’s always smart to shop around for your insurance rates before selecting a provider in case where you live can help you score a major discount on coverage. 
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Getting the Best Home or Car Insurance Rates 

Every insurance company has its own algorithm for taking these insurance premium factors and using them to calculate insurance rates.

Just because one company quoted you a certain price based on coverage limits or personal data doesn’t mean you won’t find the same policy type at a lower rate elsewhere.