Insurance premium definition
If you’ve ever owned an insurance policy, you likely know that an insurance premium is what you pay to your insurer in order to have insurance. The amount is typically a yearly figure, but it can often be paid monthly. The agent who sold you the policy probably quoted you a premium, but you can also find it on your policy’s declaration page.
People can have different home insurance premiums even when they live right next door to one another. This is because insurance premiums are based on a slew of factors, many of which are unique to the homeowner and their home.
How do insurance premiums work?
When you buy insurance, say homeowners insurance, you usually have to complete an application that asks several questions. The answers to many of these questions help the insurance company decide how risky your home is to insure, whether it can cover that risk, and how much premium to charge.
For example, home insurance companies usually want to know your home’s:
- Address.
- Square footage.
- Age.
- Building materials.
- Roof shape.
- Safety features.
- Upgrades and renovations.
- Prior claims.
But they also need details about you, such as your birthdate, Social Security number, and insurance history. All together, this information gives the insurance company some insight on the likelihood of you filing an insurance claim. That risk is ultimately what determines your home insurance premium.
How Kin calculates home insurance premiums
Most insurance companies have actuaries review your information and enter it into algorithms to determine your premiums. And to get it, they usually make you fill out long applications.
But when it comes to home insurance applications, we think the fewer questions, the better. Instead, we use technology to comb public records and pull much of the information we need to evaluate your risk. That way, you can apply and get covered quicker and with fewer complications than you would with other insurance companies.
The information we get from public sources is often more accurate than what an applicant might know. In turn, this makes our home insurance premiums more accurate.
What do insurers do with insurance premiums?
Insurance companies may use premiums to:
- Pay claims.
- Cover administration costs.
- Grow their assets through investments.
By investing some of their premiums, insurance companies mitigate costs to policyholders and prepare for catastrophic claims.
Why do insurance premiums go up at renewal?
Home insurance premiums do periodically go up when you renew your policy, and there are a few reasons why. We’ve listed three common ones below.
- Your insurer has to account for inflation. A good example of this happened in April 2021 when inflation caused lumber prices to skyrocket. That and other rising construction costs forced insurance companies to change their replacement cost estimates for homes. Ultimately, that led to more expensive premiums upon renewal for many homeowners.
- Your insurer has more claims than expected. Insurance companies collect insurance premiums to cover the cost of claims, but an onslaught of catastrophic claims may mean they have to raise their rates.
- You had more claims than expected. Your home insurance premium is based on what your insurance company thinks is your chance of filing claims. If you prove your insurer wrong with either more severe or more frequent claims than it planned on paying, then it may raise your rates to more accurately represent your risk.
How to lower your home insurance premium
There are several ways you may be able to keep home insurance premiums down. For example, you may want to:
- Ask about discounts. Many insurance companies offer discounts for home maintenance you might already be doing.
- Avoid filing small insurance claims. Only using your home insurance for damage you can’t cover on your own is a good way to keep your premium down.
- Pay your entire insurance premium upfront. Your insurer may offer monthly or semi-annual payment plans, but they often charge a fee when they do.
- Opt for a higher deductible. A higher deductible can lower your insurance premium. Just be sure you opt for an amount you can afford to cover if you have a claim.
