When it comes to understanding insurance, the jargon alone can be overwhelming. While high school and college might’ve taught you about the Pythagorean Theorem or that technically you can live off of cereal and water, it might not have informed you about taxes and insurance.
That’s where Thimble comes in. Today’s lesson: insurance premiums!
It’s likely that, even with preliminary insurance research, you’ve seen the word “premium” thrown around. But what is an insurance premium? And how does it affect your policy? Below, we’ll answer both those questions and more.
What is an insurance premium?
In the most basic explanation: your insurance premium is the cost of your insurance.
It is the amount you’re going to pay the insurance company for coverage—and it’s a rate agreed upon when the contract is signed. This is true for health, auto, life, small business, and just about any type of insurance.
Essentially, it is the price for the coverage plan that you’ve selected (further on, we’ll explain some common factors that affect this price).
How are insurance premiums paid?
Depending on the company, usually, you will have an annual premium that is paid in monthly installments. Your insurer will take the total cost of the premium, divide it by twelve, and you’ll have to pay for each month individually—with a set payment date. Payments are typically made via check or credit card. In many cases with annual insurance, you’re going to be expected to pay the first and last month’s premium upfront. It’s like the deposit and first month’s rent on a new apartment.
Pro Tip: While late fees certainly apply, missing a premium payment usually results in the policy being canceled. So, it’s not just about incurring late fees but the fact that you will no longer be covered. This is important to know being that, should you miss a payment one month, an incident could occur shortly after which you won’t be covered for. This is standard practice in the industry. Lastly, if you don’t pay on time, new insurance policies you add might require you to pay the total premium upfront, as opposed to the convenience of paying smaller amounts monthly (ouch).
How is the insurance premium price determined?
There are quite a few factors involved in pricing an insurance premium, and there isn’t a ubiquitous formula in the industry. As such, each insurance company will calculate the premium using their own equation. Here are the common variables:
The type of insurance you need
Every type of insurance is going to have its own baseline price, or at least a ballpark number. For instance, acquiring health insurance isn’t going to be the same as, say, dental insurance. Why? Because health insurance covers a heck of a lot more. Likewise, renters insurance is likely going to cost significantly less than homeowners insurance.
Your policy limit
If you’re insuring your business with a $1,000,000 policy limit (the amount of total coverage available to you), you’re going to pay less than someone who is taking out a policy with a $10 million limit. Typically, the higher your policy limit, the higher your insurance premium is going to be. As with most things, in insurance, you get what you pay for.
Be it you, personally (think: car accidents), or your small business (think: lawsuits), your history plays a big role in calculating the cost of your insurance premium. For instance, if you are looking for an auto insurance policy, yet you’ve totaled four cars in the last three years, you’re going to be considered a liability. This can double (if not triple) your price. The same goes for small business insurance. If you’ve been sued or had claims filed against you prior, then you will be considered more of a liability than a business owner with a “clean” record.
The risk inherent to the policy
Another big aspect is the risk involved in what you do. A small business insurance policy for a local bookstore is likely to be a lot less expensive than one for a roofing company. Why? Because of the risk involved. This applies across every insurance type and is specific to the industry, profession, and the individual. For instance, someone with a pre-existing medical condition is going to have a higher health insurance premium. This, of course, is because there is more risk in insuring them.
Your location also (usually) plays a part in the way an insurance premium is priced. If you’re in a “high risk” area, then you might have to pay more for coverage. But what does that mean, a “high risk” area? Let’s say you just bought a home in Florida. Now you want homeowners insurance. Being that Florida is the number one state in the US for hurricanes, this could play a massive part in the total price.
Lastly, your deductible is the amount that you pay out-of-pocket prior to the coverage taking effect. This means that, if your insurance is going to cover you in the case of a specific event or incident, then you will need to pay a certain amount before the insurance “kicks in.” If you have a higher deductible, then you’ll likely pay less for your premium. If you have a lower deductible, you will likely pay more in premium per month.
Why can annual insurance premiums change?
When it comes to your annual premium changing throughout the duration of your policy, there are multiple factors that can influence this uptick in price.
For starters—if your insurance has to cover you due to something that was your fault, you can almost always bet that your premium will go up. Car insurance is a great example of this. You start off paying a certain premium, then cause an accident which results in heaps of car damages, and—after your car insurance reimburses the third parties—they then raise your premium.
Or, if a certain market experiences unexpected activity (disasters, real estate appreciation, a widespread sickness or disease), then it will affect the policy baseline price. Thus, the price you pay can also depend on what’s going on in the world at the time you’re in the market for insurance.
Thimble: insurance with premiums tailored to your business
With all of the above in mind, it’s easy to understand why some people don’t insure their companies—it’s expensive.
But at Thimble, we do things a little differently. With our on-demand and flexible small business insurance policies—you can choose to pay by the hour, day, week, or month. With Thimble, never pay for insurance when you don’t need it again.
Don’t believe the hype? Click “select a quote” or download the Thimble mobile app, input your details, review the quote we generate for you, and when you purchase, you’ll have a Certificate of Insurance immediately. All of this can be done in less than 60 seconds, and you’ll have proof, in your hand, that you don’t need to pay an annual insurance premium just to “stay covered.”
Get a quote. Believe the hype.
Our editorial content is intended for informational purposes only and is not written by a licensed insurance agent. Terms and conditions for rate and coverage may vary by class of business and state.