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What Are Insurance Premiums, Deductibles and Limits?

Updated: May 2017

If you have an insurance policy, you've likely heard of 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, boat or life, for instance) — as well as how much you may receive after a covered loss.

Here's a quick guide to these important terms:

Man and woman talking to agent.

What Is An Insurance Premium?

Insurance premium definition: 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.

How is an insurance premium calculated?

Many factors may affect premium prices. Check out the following for more information.

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
Source: National Association of Insurance Commissioners (NAIC)

Factors That May Affect Your Car Insurance Premium

  • Your age
  • Your driving record
  • Age of your car
  • Types of coverage you choose
  • Coverage limits you select
  • Where you live and drive
  • How much you drive
  • Your credit score
Source: Insurance Information Institute (III)

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
Source: III

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Featured Resource

Insurance Premiums, Deductible & Limits

Get an overview of premiums, limits and deductibles and the roles they play in an insurance policy.
Click to view infographic.

Insurance Premiums, Deductible & Limits

Get an overview of premiums, limits and deductibles and the roles they play in an insurance policy.
Click to view infographic.

What Is An Insurance Deductible?

An insurance deductible is the amount you pay out of pocket before your insurance will help pay for a covered loss. Example, if you carry a $500 deductible and have $10,000 in damages after a fire in your home, you'll likely pay $500 before your insurance covers the remaining $9,500. (The amount of coverage you have depends on the limits you choose.) Deductibles may be required for certain parts of or types of insurance policies but not for others, says the III.

Unlike health insurance, 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, says the III.

In some cases, your insurance company may set deductibles for particular policies. In other cases you may be able choose your deductible. In general, the higher your deductible, the lower your ongoing premium will be. For example, if you choose a $1,000 deductible on your auto policy, you will likely pay less in premiums than you would for a policy with a $250 deductible.

Check your policy or contact your local agent to find out what deductibles may be in effect for your policies or to adjust the amount of your deductible, if it's allowed and appropriate for your needs.

What Is An Insurance Limit?

An insurance limit is the maximum amount of money an insurance company will pay you for a covered loss. You'll typically find that the higher your coverage limit, the higher your premium may be. Limits often apply to different types of coverage within a policy. For example:

Homeowners insurance. 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) and the amount of liability coverage that may assist you in the event that you're found legally responsible for a guest's injuries or damage to someone else's property. A local agent can help you review your specific needs and explain what other specific types of coverage may be available.

Auto insurance. Typical auto insurance policies include separate limits for different types of coverage, such as liability, uninsured/underinsured motorists and medical payments. Your state may require specific minimum limits for certain coverages, according to the III. Your insurance agent can help you make sure you're meeting any requirements or provide information to help you decide whether higher coverage limits make sense for you.

Read your policy or contact your insurance agent to learn about or make adjustments to your specific limits, premiums or deductibles.

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Coverage subject to terms, conditions, and availability. Policy issuance is subject to qualifications. Allstate Fire and Casualty Ins. Co., Allstate Property and Casualty Ins. Co., Allstate Vehicle and Property Ins. Co. & affiliates: 2775 Sanders Rd Northbrook IL 60062; Allstate Life Ins. Co. & Allstate Assurance Co.: 3075 Sanders Rd Northbrook IL 60062; American Heritage Life Ins. Co.: 1776 American Heritage Life Dr Jacksonville FL 32224; In New York, Allstate Life Ins. Co. of NY: Hauppauge NY © 2017 Allstate Insurance Company, Northbrook, IL.
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