Insurance premium: What is it and How Does It Work?

Are you thinking about getting an insurance policy? If you’ve done your research, you’ve likely encountered a few terms, including the word premium, a couple of times. Here’s a little more information about insurance premiums, what they are, and how they work. Once you understand the terms more, you’ll have a better grasp of things when you talk to an insurance agent and browse through plans and policies.

What are Insurance Premiums?

When you choose a plan, one of the first things you consider is the monthly amount you need to pay for the coverage. That’s your premium. The premium ensures your loved ones receive financial compensation for losses or damages incurred. That will continue for the entire duration the policy is active if you don’t default on your payments. You can pay the premiums monthly, twice a year, or annually, depending on your insurance carrier.

Which One is Better? Monthly, Twice a Year, or Annually?

When you browse through financial products, such as term life insurance with Allstate, that’s one of the details you’ll need to decide on. Each option comes with pros and cons. Monthly payments are ideal if you have a steady income and pull in the same salary every month, so there are no surprises. If you’re a freelancer or run a business and depend on seasonal sales, you may want to go for annual payments. That way, you can start saving up for the payment with sales from your busiest months. Choosing a twice-a-year payment plan also works in this case.

How Do Premiums Work?

You must keep paying your premiums if you want your insurance policy to remain active. If you fail to keep up with the regular payments, that will void your policy and you will lose your coverage. That will also go on your record, so getting an insurance policy in the future may be even more challenging for you. Of course, some companies have grace periods, so you may want to take advantage of that.

What are Grace Periods?

Some companies allow policyholders to pay up to ten, fifteen, or twenty days after their deadline without any late fees or charges. Not all companies offer this, so you’ll want to check before you choose an insurance policy. The grace period is an extension offered by companies just in case policy holders fail to pay on time. For instance, if there’s been a storm in the country, if the payment date falls on a weekend, or if the policy holder is abroad and has no other means to send the payment. In that case, the policyholder who comes in a week late can still pay the premium without any financial repercussions or consequences.

How are Premiums Calculated?

It depends on several factors, but generally it’s based on your risk level. If you have many driving tickets and male, you are likely to get a higher premium than a female of the same age with no driving tickets on record. Your medical history will also matter.

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