Premium
The regular amount paid to an insurance company to keep a policy in force, whether or not any claims are filed.
What it means
A premium is the price of insurance coverage, usually paid monthly, quarterly or annually. Paying it keeps the policy active; missing payments can lead to cancellation after any grace period. Premiums are set based on expected risk, such as age, health, driving record, location, the property insured and the coverage amount chosen.
Premiums usually move opposite to cost sharing. A health plan with a higher deductible tends to have a lower premium, and vice versa. In health insurance, premiums do not count toward the deductible or out-of-pocket maximum, so the true yearly cost is premiums plus out-of-pocket spending.
Example
Suppose a health plan has a $400 monthly premium, a $1,000 deductible, 20% coinsurance, a $30 primary care copay and a $4,000 out-of-pocket maximum. Premiums cost $4,800 a year. In a year with very large medical bills, the most this person would pay is $4,800 + $4,000 = $8,800.
How it’s used
- Comparing insurance plans
- Budgeting for health, auto or home coverage
- Choosing between a higher and lower deductible
Good to know
- Comparing plans on total possible yearly cost, premiums plus the out-of-pocket maximum, gives a clearer picture than premium alone.
Related terms
Educational information only, not financial, tax or legal advice. Rules, limits and rates change; check the IRS, your lender or plan, or a qualified professional before acting.