How insurance works varies significantly, depending on the policy and insurance provider. Regardless, all policies come with four main components that policyholders need to be aware of to ensure that they are getting the right coverage. These are:
Premium: How much they need to pay for coverage.
Policy term: How long the policy lasts.
Policy limit: The maximum amount the policy will pay out for a covered peril.
Deductible: The amount the policyholder needs to pay out of pocket before the policy kicks in.
What is an insurance premium and how is it calculated?
When purchasing an insurance policy, the first step a person needs to take is to apply and get approved. As part of this process, insurers evaluate how much risk they bring – meaning the likelihood that they will make a claim. From this, insurance providers calculate how much policyholders need to pay for coverage. This amount is called the premium.
Several factors come into play when determining premiums:
Auto insurance rates, for instance, factor in the motorist’s age, gender, and driving history, among others.
Home insurance premiums may be influenced by weather- and climate-related events in an area such as wildfires, hurricanes, earthquake, and flooding.
Life insurance costs can go up or down, depending on a person’s medical history or smoking status.
Once approved, the policyholder will need to make payments regularly. Insurers often give the insureds the option to pay on a monthly, quarterly, semi-annual, or a yearly basis. It is crucial that they meet regular premium payments as failure to do so may affect their eligibility come renewal time or even void their coverage.