Insurance Premiums & Consumers' Legal Obligations
An insurance premium is money charged by the insurance company in exchange for coverage. The premium, sometimes called the rate, compensates the insurer for bearing the risk of a payout in the event insurance coverage is required. Since premiums for services differ between companies, it is advisable to shop around for the lowest insurance premium.
Generally, an insurance premium pays for the coverage in the insurance policy. Services provided and paid for vary by policy and type of protection. As an example, health insurance premiums pay a portion of the expense of office visits, prescriptions, and surgical procedures, and other medical services. Not all services are covered, and plans can vary. In the case of health insurance, sometimes an employer pays the premium on behalf of the insured employee. Premiums for other insurance policies, such as auto insurance and homeowners’ insurance, are paid directly by the insured.
Calculating Premium Rates
Premiums are based on statistics, and they often vary by area and among insurance providers. Automobile insurance companies, for example, typically base their premium pricing on the zip code of the insured. Some call this zip code profiling, and it can result in many drivers opting out of insurance policies, which can have negative overall effects. In essence, insurance companies try to assess the insured’s likelihood of filing a claim. The higher the likelihood, the higher the premium will be.
The underwriting department of the insurance company is responsible for the final premium calculation, which can sometimes differ from a quoted premium. The premium amount is based on statistics involving life history, age, and health. All customers applying for insurance must go through the underwriting process, which involves questions about familial diseases and an analysis of medical and motor vehicle reports. After the data is gathered, a statistician called an actuary analyzes the data. Their goal is to predict how likely it is the insurance applicant will make a claim on their policy. If the probability is high that the applicant will make a claim, the premium is also typically high.
Making Premium Payments
Premium payments are typically made monthly, semi-yearly, or annually, depending on the policy. If an insurance premium is not paid on schedule, the company may cancel the plan. In this case, the policy would be considered void. Sometimes this is called a “lapsed” policy. Payment of the outstanding amount within a certain period of time may restore coverage under the policy.
Because of the way insurance works, premium payments cannot be refunded if a claim is never made on the policy. Many insured individuals choose to make payments in exchange for the peace of mind that comes with maintaining insurance coverage. And one large claim can more than make up the money spent on premiums. Life insurance works differently from other insurance policies because it may be possible to withdraw or borrow money against this type of policy. There may be tax consequences, meaning that the beneficiaries will not receive the same amount of money after the insured dies.
