What Determines the Cost of Insurance Premiums

Insurance Premiums

Have you ever wondered what determines the cost of insurance premiums? Even if you haven't, you likely would like to know why your insurance costs so much. While it's popular to assume insurance company greed is why your premiums are so high, there are actually reasonable explanations for insurance pricing.

Auto Insurance: What Determines the Cost of Insurance Premiums

Since most people have auto insurance, let's first look at the major factors that determine your car insurance rates.


Drivers in big cities pay more than those in rural areas. The reason is that more accidents and thefts occur in cities. It costs the company more to insure a city driver, and so you pay more as well.

Age, Gender and Marital Status

Insurance companies keep lots of statistics on drivers. The statistics reveal who is most likely to be involved in accidents. Their findings consistently reveal that young, single men are most likely to be involved in an accident. Women of all ages pay less for insurance than men do. Men, however, are given a break as they get older and once they are married.

Your Driving Record

If you have a clean driving record, then you'll start off paying the lowest amount of insurance based on your group (location, age, etc.). However, if you have an at-fault accident, or if the insurance knows about your four speeding tickets, you'll be paying more for your insurance.

Your Levels of Insurance

You have complete control over this portion of your premium. By choosing to have lower liability limits and higher deductibles, you're premiums will be reduced. The problem is that if you get into a major accident, you may be picking up more of the tab than you'd like-or can afford.

Health Insurance

What determines the cost of insurance premiums for health care depends on whether you buy an individual policy for yourself, or whether you receive coverage through your employer.

Health Insurance Basics

Actuaries, who are basically statisticians that work for insurance companies, study the factors that determine what the insurance company should charge for coverage. Factors include the average costs of doctor and hospital visits in each region of the country, along with the costs of doing business, such as advertising.

Health Care from an Employer

How much you pay will be greatly affected by how much your employer chooses to contribute. The health insurance company that an employer chooses to use for coverage will set the rates for HMO's and PPO's, and how much it costs to insure family members in addition to the employee. The employer will then decide how much of that cost to pay, and how much will be passed on to the employees.

If you work in a particularly hazardous career field, the insurance company will charge more because of the increased likelihood of employees needing major medical procedures.

Individual Health Care Plans

If you purchase an individual plan directly from an insurance company, you will usually pay more than if you buy it through your employer. The reason for this is known in the industry as "adverse selection." That fancy term means that you have more information than the insurance company does, so the company is at a disadvantage. When the company offers insurance to a company with 100 employees, the actuaries can predict that a certain number will never see the doctor, another group will visit once in a while, and a third group will use the insurance a lot.

The insurance company doesn't know which category you will fall into, so they have to charge more in case you end up being someone who uses the insurance a lot. They also assume that someone in need of health insurance, or who thinks they might need insurance, is more likely to buy a plan than a healthy person.

Life Insurance

Life insurance is the most straightforward when it comes to determining insurance premiums. Just like health insurance, actuaries play a big role in setting prices.

Your Age

Your age at the time you buy the policy is the biggest factor in determine how much your premium will be. Actuaries are able to predict your life expectancy mostly from your age. The longer you have to live, the lower your premiums will be. This is why it's a good idea to lock in a rate when you are younger.

Your Health Habits

To increase the accuracy of their life expectancy calculation, insurance companies also factor in your health habits. Smokers, for example, have a higher risk of dying while the policy is in force, so they pay a higher premium. Even if you don't think cigarettes will harm you, the insurance actuaries have numbers that disagree with you.


Insurance companies make careful calculations to determine how much premiums should be. It's a careful balancing of affordability and profitability. The companies need to charge enough so that they have money to pay claims, but they can't charge too much or people won't pay for the service. Your premiums will go up and down as modifications are made to the balance.

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What Determines the Cost of Insurance Premiums