What Is An Insurance Premium?

Insurance premiums are, essentially, the price of your insurance policy. They may apply to health, dental, auto, home, and life insurances to name a few. Each type of insurance policy has its own rules for how premium prices are determined and how they work.  

How do insurance premiums work? 

Insurance premiums are usually a monthly charge that’s determined by your insurance company, and if you enroll through work, also by your employer. These payments are how you keep your policy active.  

Once you begin paying your premiums, your policy is active and ready to use when you need it. If you stop paying your premiums, your insurance policy will effectively end, and you won’t be able to use the coverage should something happen.

Different companies, policy types, and locations can have varying premium prices.  

How much are insurance premiums? 

A variety of factors play into how much your insurance policy costs. While there are some factors that apply across the board, each type of insurance has slightly different considerations when determining your premium price.  

Insurance companies typically employ actuaries to underwrite your policy. They calculate your premium based on the specific type of policy you’re looking to take out and several general factors, such as: 

• Coverage amount 
• Age
• Location
• Risk to insure 

The price of your premiums may also be affected by who is paying for the policy. For example, if you’re using employer-sponsored insurance, the cost will likely be significantly lower than if you were to purchase the policy on your own. 

Additionally, the specifics for each type of insurance policy differ, causing the premium price to change. We’ll explain the details of each type below.

Health insurance premiums 

Besides the overarching factors that determine your health insurance premiums, health insurance considers: 

• Tobacco use
• Income level
• Number of people being covered (i.e., individual or family plan) 
• Plan category — bronze, silver, gold, platinum, or catastrophic 

Health insurance companies are not allowed to take your gender or health history/pre-existing conditions into account.  The biggest factor in determining how much you’ll pay for health insurance is whether you’re choosing to pay for a policy on your own or if it’s offered through your employer.

According to the Kaiser Family Foundation, the average annual premiums for health insurance were $7,739 for single coverage and $22,221 for family coverage. However, those amounts change dramatically when using an employee benefits plan. On average, employees pay $1,669 for single coverage and $5,969 for family coverage annually — that’s paying roughly 20% of the total cost when enrolling for insurance through their employer.

Dental insurance premiums

For dental insurance, there are fewer additional factors to consider. Mostly, your considerations are how many people you’ll be insuring (just yourself vs. your whole family) and the level of coverage you need. Different levels of coverage provide benefits for different procedures, so it’s important to determine which you may need or want to be prepared for when choosing a plan.  

Similar to health insurance, dental insurance is often offered through your workplace benefits package. On average, dental insurance premiums range from $20-50/month for an individual and $50-150/month for a family. 

Life insurance premiums

Life insurance premiums costs are determined by factors that impact your longevity, including:

• Age 
• Health history and pre-existing conditions 
• Gender
• Hobbies and lifestyle — smoking, drinking alcohol, participating in dangerous activities, having a dangerous occupation, etc.  

On average, a 35-year-old can expect to pay premiums of $25-30 per month for a typical life insurance policy. But when that coverage is offered through their employer, it’s often free or significantly cheaper. However, those plans may not include a high enough death benefit, meaning employees may need to seek additional coverage.  

Auto insurance premiums

Auto insurance premiums largely depend on the type of location you live in and your car specifically. But they also have more expansive determining factors than healthcare insurance. In addition to the common factors, auto insurance providers also routinely consider:

• Gender 
• Driving record 
• Usage — how often and how far you drive your car 
• The age, condition, safety, and total cost of your vehicle (to determine how much it would cost for repairs or replacement)
• The type and amount of coverage you want/need

Car insurance is a federal requirement for all drivers in the U.S., so it’s important to know what you’re looking at. The average car insurance premiums for full coverage are $148/month or $1,771/year, according to Bankrate and Quadrant Information Services. 

Homeowners insurance premiums

Homeowner insurance premiums are more straightforward. The price of premiums is largely affected by where your home is located and its characteristics. However, there are a few additional factors homeowners insurance companies analyze, including:

• The age of your home
• The architectural style of your home 
• Previous damage to your home 
• The likelihood of natural disasters in your location 
• Your city’s crime rate  
• Previous homeowners insurance claims 
• Pets (certain dog breeds are believed to pose a higher risk and therefore raise your premiums) 

The national average for homeowners insurance premiums is $1,383/year for $250,000 of coverage in 2022. However, this number can change dramatically based on your circumstances.  

How are insurance premiums paid?

Typically, insurance companies offer installment-type premium payments, which can be paid monthly or semi-annually. However, there are some insurance companies that require you to pay the entire price of the policy up front each year with an annual payment. Today, these payments can often be made online, but it can also be paid via a physical check.  

If you’re buying insurance through your employer, your organization may pay for part or all of the premiums. Your contributions also may be made through a payroll deduction.