Insurance is a tool to reduce financial loss or hardship. It is a contract between the insured and an insurance provider under which the insured can be paid for certain losses. The insurance provider pools clients’ risks to make payments affordable for the insured. It is protection that can help cover the cost of unexpected events such as theft, illness, property damage or death. The protection or coverage you receive can be for a limited period of time or throughout your lifetime. In return for the protection, you pay a premium.
Insurance Premium is the amount you pay periodically, depending on the type of insurance and what is stated in your policy. It is the cost of your insurance, and the amount you pay is based on the probability that you will suffer a claimable loss. Other factors that are considered in computing premiums can be the insured’s age, health, lifestyle or family history. For health, dental, home, and auto insurance policies, the amount for premiums also depends on the deductibles.
What happens when you pay your Insurance Premium?
When you pay your Insurance Premium, your money goes into a pool of funds with many others. Some of that pool helps the policyholders who suffer hardship in that period. When a hardship or loss occurs, a claim is made. The Claim is the official request for the insurer to pay for a covered loss. The insured’s agent or broker can assist in claiming benefits. Supporting documents will be required, depending on the type of loss (for example, photographs of an injury or property damage for an accident or property insurance claim, or a death certificate for a life insurance claim) during claims processing or claims investigation.
What factors determine the Premium you pay?
An insurance premium is usually a product of four main factors:
- Type of Coverage
The type of coverage an insurance policy offers differs from one insurance company to another. The more coverage you get or the more comprehensive coverage you choose, the higher your insurance premium may be. Remember, the premium is the cost of your coverage.
- Amount of Coverage
Whether you are purchasing life insurance, car insurance, health insurance or any other insurance, you will always pay more premium (more money) for higher amounts of coverage. For example, in home insurance you can save up to 25% by increasing your deductible from GH¢500 to GH¢1,000. In the case of health insurance, you can not only take higher deductibles, but look at policies with different options like higher co-pays or longer waiting periods.
- Personal Information
The Personal Information of the Insurance Policy Applicant is also a factor that influences Insurance premium. Personal Information such as your insurance history, where you live, and other factors of your life are used as part of the calculation to determine the insurance premium that will be charged. Every insurance company will use different rating criteria. Some companies use insurance scores which can be determined by many personal factors, from car accident frequency or personal claims history and even occupation. These factors often translate into discounts on an insurance policy premium. For life insurance, other risk factors specific to the person being insured will be used as well, these can include age and health conditions.
- Competition in the Insurance Industry
Industry competition is another critical determinant of Insurance premium. If an insurance company for example decides they want to aggressively pursue a market segment, they may deviate rates to attract new business. This is an interesting facet of insurance premium because it may drastically alter rates on a temporary basis, or more permanent basis if the insurance company is having success and getting good results in the market.
Where do your premiums go?
Premiums are used to pay claims costs, investments, and operational expenses. They practice diligent financial management so that claims can be paid. For instance, they invest in low-risk investments that can be easily liquidated in case they need to pay out claims. They also set money aside as a legal reserve. They are required by law to maintain this amount. The legal reserve guarantees that an insurer can pay a large number of claims within a short period of time
How to Get the Lowest Insurance Premium
The key to getting the most competitive insurance premium is finding the insurance company that is most interested in insuring you. When an insurance company’s premium rates go too high all of a sudden, it is always worth asking your representative if there is anything that can be done to reduce the premium. If the insurance company is unwilling to change the premium, they are charging you, then shopping around may find you a better price. Shopping around will also give you a better understanding of the average cost of insurance for your risk.
Asking your insurance advisor to explain the reasons why your premium increases or if there are any opportunities for getting discounts or reducing insurance premium costs will also help you understand if you are in a position to get a better price and how to do so.
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