Insurance Premium

  

Categories: Insurance

It's what you pay to be insured.

Want a million dollar life insurance policy and you're in good health in your 20s? Then you'll pay an insurance premium of about 50 bucks a month for the privilege. Want to insure your car for any damages above 5 grand? Then you'll pay a premium, priced mostly based on how valuable your car is...like, how much damage could there be if there was a really bad crash? The key determinants of premiums revolve around the size of the deductible and the risk factors to the insurance company backing the risk.

If you have a $100 deductible on your car, then every time the door is dinged and you want it fixed, you take it in to Manny's Mangled Motors, and you get a bill for $372 for the fix-it job. You pay $100 out of your own pocket, and the insurance company pays the remaining $272. And the first time that happened, they'd raise rates on you a whole lot, because you'll clearly be an expensive insuree for them.

But if your deductible was 5 grand, then things run differently. If you first have to come up with 5k out of your own pocket, then it's likely you rarely or almost never call the insurance company unless the crash has been pretty awful. So if you were the insurance company, you'd charge a whole lot less for premiums with a 5k deductible than a $100 one.

And, of course, the cost is vastly different if you're insuring a Honda Accord versus a Bentley.

Related or Semi-related Video

Finance: What is whole life insurance?6 Views

00:00

and finance Allah shmoop What is whole life insurance Well

00:07

if health insurance is a safety net for your health

00:11

then guess what life insurance is yet a safety net

00:14

for your life I e In case you die which

00:17

unless you found the fountain of youth or a genie

00:19

in a lamp well it's gonna happen sometime with life

00:22

insurance There's the owner of the policy who is from

00:25

usually also the insured You know the person whose death

00:29

makes it rain money The person who would get that

00:32

money is the beneficiary And of course there's the insurer

00:36

the life insurance company who takes your money every month

00:39

They're also the ones that cough up a lot of

00:41

cash when you eventually bite the dust Well whole life

00:45

insurance hole there with a W is a type of

00:48

permanent life insurance That kind of investment E It's permanent

00:52

because it follows you for life like an insurance of

00:55

Grim Reaper you know always lurking in the shadows You

00:57

know whole life insurance was born from its mother term

01:01

life insurance and back in the day when life insurance

01:03

was just getting it start in life while term life

01:06

insurance was the only option Like you'd pay fifty seven

01:09

bucks for a month's worth of a million dollar life

01:11

insurance policy in your twenties if you didn't die that

01:14

month Well congratulations But then the insurance company kept all

01:17

the money you just gave them and then it would

01:19

start all over again the following month For the insured

01:22

life insurance can feel kind of like a lose lose

01:26

situation If you live well you're making payments that go

01:29

into an abyss and if you die while you're dead

01:32

But at least your kid or mom or whoever the

01:34

beneficiary is has some money Well life insurance buyers got

01:37

tired of this term life insurance gamble every month losing

01:40

all the money they gave to the insurance companies So

01:43

they began Teo What's called Oh yeah think And then

01:46

using the power of frighteningly large groups will they began

01:49

to invest the money into markets with like a thirty

01:53

year time horizon No more giving over of all that

01:56

fifty seven bucks every month to the insurance company watching

01:59

all the money go down the drain As you might

02:02

imagine the life insurance company's weren't very fund of people

02:05

getting smart on them investing their money for insurance instead

02:08

of dropping it into well you know the insurance black

02:11

hole So they decided to cut a deal with those

02:13

wanting to be insured They said We'LL cover you for

02:17

three months instead of one If you fall off a

02:20

bridge or get hit by a bus while your wife

02:22

and kids will be seeing a cool million dollars and

02:26

then they said will invest half of your monthly premium

02:29

in an index fund Yes we'LL even let you choose

02:32

which index fund we put it into and the other

02:34

half Well we get to keep And if you want

02:36

to back out and terminate the plan not because you're

02:39

in a wooden box but because you ran out of

02:41

money or moving or something Well you can keep eighty

02:44

percent of what's left in that pot Well this whole

02:48

structure for the revolved into what we have today whole

02:51

life insurance which covers you not for one month or

02:54

three but for life Remember it's permanent You could still

02:57

cancel payment or future payments but it would cost you

03:01

a pretty penny Whole life insurance includes building up savings

03:04

from part of your premium payments not watching all your

03:07

premiums go into the insurance black hole Since whole life

03:10

insurance is permanent it acts as a no touchy investment

03:13

account And because it has high fixed payouts when you

03:16

die well it's super expensive In essence Ah whole life

03:20

insurance plan is a tricycle style a handhold the investment

03:24

vehicle that tries to pull a Miley Cyrus right getting

03:27

the best of both worlds For those with the cash

03:29

and discipline and the ability Teo stay alive that we

03:32

watch out for that bus You can replace the need

03:35

to even have a whole life insurance policy by simply

03:38

buying your own shares of an index fund or mutual

03:40

fund all on your own with no insurance company middleman

03:43

taking a cut then you own one hundred percent of

03:46

the investment and all that's left to do after then

03:48

is you know not die for a decade or three

03:51

Enjoy your loot

Up Next

Finance: What is Life Insurance (Term v. Variable)?
45 Views

What is term life insurance, and variable life insurance? Hit play to find out, and, uh...let's hope you live long enough to figure out the answers.

Find other enlightening terms in Shmoop Finance Genius Bar(f)