What is an insurance premium?

What is an insurance premium?

A premium is insurance-speak for the price you pay for insurance coverage. Why they don’t just call a premium the “price of insurance” is unclear, but it’s what you have to pay to make sure you receive continued coverage from your insurance company.

Premiums vs. deductibles

Your premium is a separate insurance payment from your deductible. While you pay your premium in order to have coverage, you only need to pay your deductible when you file an insurance claim.

In other words, paying your premium keeps you covered; paying your deductible gets you closer to having your claim paid.

How your premium is calculated

Many different factors come into play when calculating your premium amount. You’ll pay different insurance rates and premiums for the different types of insurance in your life, such as homeowners insurance, health insurance, life insurance or auto insurance. We’ll focus on small business insurance here.

The first factor depends on what type of coverage you’re looking for. General liability, workers’ comp, and commercial property, for example, will all cost different amounts for individual businesses depending on their operations.

Your industry is another major factor in determining the cost of your premium. As you can imagine, professions like fitness and construction will have higher general liability premiums than businesses like accounting or e-commerce because there is more risk for bodily injuries and property damage.

The next key component used to calculate your premium is the size of your business in terms of the number of employees, payroll and sales. More employees mean more people to cover, so your premium cost will rise.

Higher payroll and sales mean you’re doing more business, which means you’re (probably) interacting with more people — which means there’s a higher likelihood that an accident might occur.

The location of your business also affects your premium payment. If you’re based in a relatively sleepy town, your premiums will generally be lower than someone with an identical business located in the middle of a bustling city. The chances of something going wrong increase in a busy location, and your insurer charges accordingly.

In addition, especially when it comes to workers’ comp, different states have different laws relating to the amount of coverage you legally have to carry, which will affect how much you pay for your premium.

Your claims history also determines your premium. If an insurer looks at two similar businesses, but one has a history of filing many claims, that business is considered a bigger risk, likely resulting in higher premiums.

Your work experience also plays a part in how much you might pay for insurance. The number of years you’ve run a business in your field can impact your insurance rates.

For example, if you’ve been a carpenter for 15 years with no claims, you can expect to pay less than a carpenter who’s been in business for four years because you have more skills and knowledge of your field.

The final piece that determines your premium is how much coverage you want. A $1,000,000 policy will cost significantly less than a $5,000,000 policy.

Note: It’s important to provide the most accurate information about your business when you get a quote for insurance to make sure you get the coverage that is right for you and any claims are processed without delays.