What Is An Insurance Premium?

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What Is An Insurance Premium?

What is an insurance premium?  We know that we write checks to the insurer on a regular basis.  But, what is an insurance premium, exactly?

What are we actually paying for and where does that money go?

Insurance is actually a form of risk management.  Early societies learned that fire, theft and other incidents could cause massive losses of property and livelihood.  They were also aware that when someone died, those that were dependent on the person might be left without a means to support themselves.

The earliest form of insurance was simply to help other people, knowing that they would return the favor if a similar event happened to you at some point in the future.  For example, if a fire burned down your neighbor’s home, you would help rebuild it.  Members of the community that did not help could not count on others to help them.

The possibility existed that you might never need help.  In that case, you might consider the effort wasted.  In the same way, you might consider an insurance premium wasted, if you never need to file a claim.

Insurance companies make money through collecting premiums and making unrelated investments.  Determining the amount to charge to insure an item, or a human life, is referred to as underwriting and is a matter of risk assessment.  If the risk that the company is taking on is high, the premiums they charge will be higher.  

For example, if you have had numerous traffic accidents or speeding tickets, the premium that a company charges to insure your car against future accidents will be higher.  If the company feels that the risk is too great, they may refuse to write the policy altogether.

In recent years, there was an insurance crisis in Florida caused by numerous claims due to hurricane, water and wind damage.  It became unprofitable for insurers to write policies for homeowners in some areas of the state.  In North Carolina, people throughout the state pay higher premiums because of frequent claims made by residents in the Outer Banks, where hurricanes are frequent.

So, sometimes, it is not the individual’s or the property’s history that causes a company to charge higher premiums, but the number of claims made by an entire community or a specific part of the community.  An example is charging more to insure younger drivers, because younger drivers, in general, have more accidents.

What we are actually paying for when we pay any type of insurance premium is peace of mind.  You can easily get quotes and compare premiums online.

Just choose the insurance type and your state from the one of the forms on the left hand side of this page.

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