Insurance comes with its own terminology, and two words you’ll hear often are “premium” and “deductible.” They’re easy to mix up, but they mean very different things. Here’s a simple breakdown to help you understand how each one works and how they may affect what you pay for coverage.
Premiums
Your premium is the amount you pay for your insurance policy. In general, the more coverage you choose, the more your premium may cost because the insurance company may be taking on more potential risk if you have a covered claim. Premiums can vary from person to person because they are based on several factors, such as:
- Your driving record
- Your age
- What you drive
For example, you and a friend may both have auto insurance for similar vehicles, but your premiums may not be the same. One of you may have a cleaner driving record, drive an older vehicle or qualify for discounts the other person doesn’t. Let’s say Joe and William are both 24 years old and drive the same type of sedan. Joe has two speeding tickets, while William has a clean driving record. William also recently bought a home and insures both his home and vehicle with the same company. In this example, Joe may pay a higher auto insurance premium because his speeding tickets could make him a higher risk to insure. William may pay less because of his driving record and possible multi-policy discount.
The same general idea applies to homeowners insurance. A home’s location, condition and features can all play a role in the premium. If your home is in an area with a higher risk of wildfires, severe weather or other natural disasters, your premium may be different from someone who lives in a lower-risk area. Features like a pool or trampoline may also affect your rate because they can increase the chance of a claim. Your insurance agent can help you understand what factors may apply to your situation and whether you qualify for any discounts.
Deductibles
A deductible is the amount you agree to pay out of pocket for certain covered claims before your insurance pays its portion. For example, if your vehicle has $2,500 in covered damage from a hailstorm and you have comprehensive coverage with a $500 deductible, you would pay $500 and your insurance company would pay the remaining $2,000, subject to the terms of your policy.
Your deductible can also affect your premium. Choosing a higher deductible usually means you’re willing to pay more out of pocket if you have a claim, so your premium may be lower. Choosing a lower deductible may make your premium higher, but you would typically pay less out of pocket for a covered claim.
If you have questions about premiums, deductibles or how they work together, talk with your insurance agent. They can help you review your options and choose coverage that fits your needs and budget.