When you buy and use an insurance policy, the insurance company charges you a certain amount in exchange for providing coverage – this amount is the insurance premium. This is paid for the policies that provide coverage for your life, car, home, health, and other valuables.
Depending on your insurance plan, you may pay the insurance premium monthly or semiannually. Also, some insurance companies might ask you to pay the full premium before your project starts. If you’re an insurance policyholder, you may ask yourself: how do companies calculate insurance premiums? To answer this, Bill Schantz discusses five ways to calculate insurance premiums. Read on.
5 Ways to Calculate Insurance Premiums as Per Bill Schantz
According to Bill Schantz, here’s how insurance premiums are calculated:
1. Age
Insurance agencies start by checking your age so they can predict the possibility that you will need to buy an insurance plan. When people purchase health insurance at a young age, they’re less likely to require medical assistance; therefore, their premiums are typically cheaper.
However, insurance premiums tend to rise as people grow older, increasing the likelihood of needing medical care more often. In addition to that, if you’re a teenager and are building your driving experience, your car insurance premiums will be more expensive.
2. Personal Information
According to Bill Schantz, personal information is another essential factor that insurance companies take into account when calculating premiums. Based on the type of insurance policy you’re purchasing, insurance agencies look at certain aspects, including:
- Gender
- Marital status
- Lifestyle
- Claims history
- Driving record
- Health
- Credit history
- Smoking status
- Family medical history
- Hobbies
- Job
- Place where you live
All these factors contribute to calculating premiums for different insurance plans – from car insurance to life insurance.
3. The Coverage Type
Today, you can find numerous options if you want to buy an insurance plan. Generally, premiums depend on how comprehensive your chosen coverage is. The more comprehensive it is, the more expensive it will be.
To give you an idea of how this works, if you purchase a car insurance policy (covering liability only), it will come cheaper than a policy with the following:
- Medical payments
- Collision coverage
- Comprehensive coverage
- Liability coverage
- Uninsured/underinsured motorist coverage
4. Actuarial Tables
Most insurance agencies hire business professionals (actuaries) to help them calculate the risk of financial loss using statistics. These calculations help them predict the possibility of the insurance claim.
They do this by producing a statistical table – called an actuarial table that insurance companies use to set their policy inputs.
5. The Coverage Amount
The science behind coverage amount is pretty straightforward to understand. The less coverage, the cheaper the insurance premiums, regardless of your insurance type. To give you an idea of how this works, when purchasing health insurance, you will have to pay lower premiums for a similar kind of coverage – if you have a higher deductible.
Similarly, an insurance policy for a $500,000 house will be more expensive than a $200,000 house.
Final Words by Bill Schantz
It’s no secret that insurance policies and premiums go hand-in-hand. The insurance company charges you a certain amount as a premium for providing the coverage – which you can pay monthly or semiannually. In some cases, you might have to pay the total premium before your plan commences. If you have an insurance plan and want to determine how its premium is calculated, check out Bill Schantz’s factors above.