Nearly everyone is covered by some sort of insurance policy, whether it's health insurance, auto insurance, or life insurance. If you've ever shopped for an insurance policy, you've probably encountered the terms "premium" and "deductible." But what exactly do these terms mean, and how do they impact one another? Read on to learn more about the distinctions between premiums and deductible.
What Is a Premium?
An insurance premium is the amount of money that an individual person or a business pays in exchange for the coverage offered by an insurance policy. The amount of your particular premium will depend on a variety of factors, including the type of policy, the likelihood that you will need to make a claim under the policy, and where you live. You might also have some options when it comes to how often you pay your insurance premiums. Some policies allow you to make monthly installments, while other types of policies require an annual or semi-annual payments.
Insurance companies rely on actuaries to determine the appropriate amount of a premium for a particular policy by taking into account all of the relevant risk factors. Insurers use the premiums that they collect to cover the liabilities associated with the policies that they underwrite. Frequently, insurance companies invest the premiums, while retaining an adequate reserve for paying out claims.
Once your policy term has concluded, it's possible that the amount of your premium might be increased. This can be due to several factors. If you submitted a claim during the term of your insurance policy, this may result in a future increase your premium. Or, if the risks associated with your particular type of policy increased for some reason, your premium may also increase for this reason.
Also, understandably, failure to pay your premium when it's due will result in the cancellation of your policy. For example, if you pay $175 per month for your health insurance coverage, in order to keep your health insurance benefits active, you will be responsible for paying this amount every month, or as allowed by the policy.
What Is a Deductible?
A deductible, on the other hand, is the set amount that you must pay each year (in addition to your premium) towards a loss or liability before your insurance company will start paying on your behalf. Your deductible starts over at the beginning of each year, and you'll have to meet your annual deductible again before insurance will begin to pay.
For example, if your health insurance plan has a $1,000 deductible, you must meet this amount before your insurance company will start paying your medical bills. If you incur an emergency room bill of $800, you will be responsible for paying this amount in full. However, if you have an emergency surgery that ends up costing $50,000, you will only be responsible for paying the first $1,000, and thereafter your insurance company will begin paying your medical bills pursuant to your policy.
How Are Premiums and Deductibles Related?
The amount of your premium has a direct relationship to the amount of your deductible. When shopping for an insurance policy, it may be tempting to choose the policy with the lowest premium. However, be aware that a policy with a lower monthly premium will typically have a higher deductible. A plan with a higher monthly payment and a lower deductible may be a better option, depending on your circumstances.
When deciding on an insurance policy and deductible amount, it's helpful to consider how you are likely to use your insurance benefits. If you think it's unlikely that you will use your insurance very often, then a plan with a lower monthly premium and a higher deductible will likely be adequate protection. On the other hand, if you think you will be relying on your insurance frequently (for example, if you have a medical condition that requires frequent medical care), a higher monthly premium and lower deductible might be the better way to go. When looking at deductibles, it's helpful to consider how much, in case of an emergency, you would be able to pay out-of-pocket at any given point.
Get Legal Help with Premiums, Deductibles, and Other Insurance Issues
There are many issues to consider when shopping for insurance. If you already have an insurance policy, and you have a conflict related to premiums, deductibles, or any other insurance issue, you may want to seek legal counsel. FindLaw can help you find an experienced insurance law lawyer in your area.