Knowledge Base

An insurance premium is the amount of money that an individual or business must pay, usually monthly, to purchase an insurance policy. The insurance premium is income for the insurance company and doesn’t count toward out of pocket health expenses incurred by the individual who owns the policy. Instead, the policyholder deductible, coinsurance, or co-pays out of pocket for any expenditures incurred.

The price of an insurance premium for a given insurance policy can vary and depends on a variety of factors. Among those factors are the type of insurance coverage, the likelihood of a claim being made, the area where the policyholder lives or operates a business, the behavior of the person or business being covered, and the amount of competition that the insurer faces. For example, the likelihood of a claim being made against a teenage driver living in an urban area may be higher or lower compared to a teenage driver in a suburban area. In general, the greater the risk associated with a policy, the more expensive the insurance policy will be.

Insurance allows individuals to mitigate costly or unexpected events in their lives by paying a combination of premiums and out of pocket expenditures in exchange for financial limits on what they have to ultimately pay. Insurance companies make an estimate of how much on average each individual will cost to cover, and then charge that amount plus a little more in order to make money from the transaction.

Community rating is a regulation that prevents health insurance companies from charging different people different prices based on their health status, age, or other factors. For example, before the Affordable Care Act was passed, health insurers were typically not allowed to charge seniors more than five times what was charged to individuals in their twenties. The ACA lowered that ratio from five-to-one to three-to-one, which lowered health insurance premiums for seniors, but raised them for younger Americans.