What are insurance premiums, deductibles and limits?
Last updated: January 1
If you have an insurance policy, you've likely heard of insurance premiums, deductibles and limits. But, do you know what each of these terms means? Each of these concepts helps determine how much you'll pay for your insurance (homeowners, auto, or motorcycle, for instance) — as well as how much you may receive after a covered loss.
If you’ve ever gotten lost on these terms when asking yourself “what is an insurance premium?”, here's a guide with insurance premium definitions to help you understand these terms. Be advised that some of these definitions and examples may not apply for certain types of life insurance.
What is an insurance premium?
An insurance premium is the amount you pay to your insurer regularly to keep a policy in force. You may be able to pay premiums monthly, quarterly, every six months or annually, depending on your insurance company and your specific policy. If you do not pay your insurance premium, your policy will be canceled and you will not have financial protection for claims.
How is the cost of an insurance premium calculated?
Many factors may affect the price of an insurance premium. Here are some of the factors that may affect how much you'll pay for a policy. The price you pay will be different if you are buying homeowners insurance, car insurance or life insurance.
Factors that may affect your homeowners Insurance premium
- Coverage limits you choose
- Deductible amounts
- Optional coverages you select
- Your home's age and condition
- Your claims history
- Your credit rating
- Type of home construction
- Local fire protection
- Discounts for deadbolt locks, alarms or insurance bundling
Source: National Association of Insurance Commissioners (NAIC)
Check with your insurer to see whether you qualify for home insurance discounts to help reduce the cost of your policy.
Factors that may affect your car insurance premium
- Your age
- Your driving record
- Type of car you're insuring
- Age of your car
- Types of coverage you choose
- Insurance coverage limits you select
- Where you live and drive
- How much you drive
- Your credit score
Source: Insurance Information Institute (III)
You may be able to take advantage of car insurance discounts to help lower your premiums. Check with your insurer to see which discounts are available to you.
Factors that may affect your life insurance premium
- The amount of life insurance coverage you buy
- The type of life insurance policy you select
- Length of your policy
- Your age, health and life expectancy
What is an insurance deductible?
Insurance deductibles are the amount of money you pay out of pocket toward a covered claim.
For example, suppose you select a $500 deductible when you purchase dwelling coverage on your home insurance policy. Later, a fire causes $10,000 of damage to your home. If your claim is covered, you'd pay your $500 deductible toward repairs, and your insurance would pay the remaining $9,500.
When you meet your deductible, it means that you have paid the entire amount of your coverage's deductible, and your insurance will help cover the remaining costs of your covered claim, up to your coverage limit.
You'll likely have multiple deductibles on the same insurance policy. That's because each coverage may have its own separate deductible. Unlike health insurance premiums, where you usually have to meet a single deductible for an entire calendar year, deductibles for other types of insurance policies generally apply each time you make a claim.
In some cases, your insurance company may set deductibles for particular policies. In other cases, you may be able choose your deductible. You may be able to save money on premiums by choosing higher deductibles. In general, the higher your deductible, the lower your premium will be. For example, if you choose a $1,000 deductible on your auto policy, you will likely pay less in auto insurance premiums than you would for a policy with a $250 deductible.
Check your policy or contact your insurer to find out what deductibles may be in effect for your policies or to adjust the amount of your deductible.
What is an insurance limit?
An insurance limit is the maximum amount of money an insurer will pay toward a covered claim. The higher your coverage limit, the higher your premium may be. Limits often apply to different types of coverage within a policy. For example:
You'll likely want to consider a number of factors when choosing your homeowners insurance coverage limits. These may include:
- The amount it may cost to rebuild your home at current construction costs (dwelling coverage)
- The value of your belongings (personal property coverage)
- The amount of liability coverage that may assist you if you're found legally responsible for a guest's injuries or damage to someone else's property
Your insurer can help you review what specific types of coverage may be available to fit your situation.
Typical auto insurance policies include separate limits for different types of coverage, such as:
- Auto liability coverage: Each state sets minimum liability limits that all drivers are required by law to purchase. However, you may want to consider increasing your liability insurance coverage limits to help protect yourself from the unexpected.
- Uninsured/underinsured motorist coverage: Just like auto liability coverage, some states require these coverages and set minimum coverage limits you must purchase. You may be able to increase your coverage by selecting higher coverage limits.
- Personal injury protection (PIP): In "no-fault" states, this coverage may be required or optional. Where PIP is required, states set mandatory coverage limits drivers must purchase. You may be able to purchase higher coverage limits.
- Medical payments coverage: This coverage is typically optional. You may be able to select your coverage limits, up to a certain amount specified by your insurer.
- Comprehensive coverage: Your comprehensive coverage limit is typically the actual cash value (i.e., the depreciated value) of your car.
- Collision coverage: Your collision coverage limit is typically the actual cash value of your vehicle.
Insurance premium FAQs
An insurance premium is the amount you pay each month (or each year) to keep your insurance policy active. Your premium amount is determined by many factors, including risk, coverage amount and more – depending on the type of insurance you have. This does not apply to all types of life insurance.
Whether a premium is tax deductible depends on the type of insurance. Typically, premiums for health, life and auto insurance aren’t tax deductible. But there are premiums related to business or trade may be partially or fully tax deductible – like, for example, business insurance, self-employed health insurance or contributions to a health savings account on your health insurance.
Auto insurance premiums can go up or down for many reasons outside of having filed a claim. Car insurance premiums are determined by a variety of factors, including but not limited to your driving history, vehicle type, coverage amount and where you live. So, if for instance, you’ve adjusted your coverage or added a new vehicle to your policy, your premium may likely be affected. Also, if there is an uptick of driving accidents in your area, your rate may go up as a result.
Yes, choosing a higher deductible can reduce your premium. But a higher deductible also means you’d be paying more out of pocket before your insurance coverage kicks in.
Premiums for a life insurance policy designed to protect your family are not tax deductible. But a life insurance policy for an employee of your business might be since the premium would be considered a business expense.
Learn more about insurance premiums from your insurer
Many factors are used to determine what you pay on your specific insurance policy. To have the most well-rounded understanding of your protection, and what you pay for it, be sure to reach out to your insurer for any questions you have. They can clue you in on what affects your premium, and ways you can save money – whether through discounts or other means – if yours happens to go up.