When you buy insurance, the company will charge you money in exchange for the coverage that it will provide. This amount of money that you pay is known as the insurance premium. If you are thinking about buying an insurance policy, questions like, ‘how to calculate premium for insurance?’ might run through your mind and we have the answer to that.
The premium is decided after considering various factors, and it is different for each insurer and each policyholder. The type of insurance policy that you opt for will decide if you pay the premium monthly, quarterly, or semi-annually. You might also have to pay the full amount at once before the coverage starts.
What is the right amount of premium one must pay for a specific good? There is no fixed set of costs for insurance premiums.
You might have the exact same good insured as someone else with the same coverage and still end up paying more premium. This is because the amount of premiums charged depends upon the insurance company and is calculated keeping in view certain factors. Let’s understand how insurance premiums are calculated.
Insurance companies consider various personal and financial factors while calculating the premiums. While you fill in the policy form, there are various details that you are asked to provide. Depending on these the insurers evaluate the insurance premium to be charged. The main factors that affect the insurance premiums are:
1. Age: Insurers look at the age of the insured in order to predict the chances of the insurance policy being used. For instance, as young people are healthier, they are less likely to claim the insurance and therefore, might get lower premiums as compared to older people.
2. Type of coverage required: Higher the coverage more is the premium. For instance, an auto insurance plan with liability only will have a less premium as compared to a plan that includes medical expenses too.
3. Occupation and income: Some occupations, such as pilot, soldiers, gas industry workers, etc. are considered more dangerous than others by the insurers. People working in these fields might have to pay higher premiums compared to people working in other safer areas. Insurers also look at how much a person earns to ensure that they will be able to afford the premium payments. Debt is another factor that influences the cost of your premium.
4. Personal information: The insurance company takes a very close look at the personal aspects of the policyholder’s life such as medical history, credit history, marital status, lifestyle, habits like smoking, etc.
Actuaries are appointed by most insurance companies to assess the risk of financial loss using statistics and mathematics to predict the probability of the insurance being used. They create a table that is given to the insurance company’s underwriting department, the professionals there then use this information to calculate the premiums.
To get the best coverage at an affordable price, it is important to take your time and thoroughly research through the various option available, both online and offline. Understanding the premium calculation process might help you to predict the amount of premium that might be charged and plan things accordingly.
Are you looking for a new insurance policy or a policy renewal? Reach out to us and let us assist you.