Health Insurance Articles

Understanding How Your Monthly Health Insurance Premium Is Calculated

2010-12-20

An insurance premium refers to the actual amount of money or fee that is charged by insurance companies for coverage. For health insurance in particular, there are several factors that come into play when a monthly insurance premium is calculated.

One of the factors will be services which is the primary feature of health insurance coverage. The selection of procedures and medical services a plan will cover, along with its corresponding costs will have a direct impact on the insurance premium.

Age and gender are also taken into consideration when calculating insurance premiums. The older one is, the higher the monthly insurance rate will be. Younger individuals tend to be healthier and more resistant to diseases and health conditions. Correspondingly, as people age, they become weaker and more susceptible to certain types of diseases. Women will need more health and medical care as opposed to men. Aside from their privilege of child bearing, they are also by nature, more susceptible to certain types of diseases. Therefore, women tend to spend more for their health insurance coverage.

Occupations affect rates as well. The more hazardous a profession is, the higher the insurance rate the individual has to pay. For instance, an employee of a nuclear plant will pay higher rates as compared to an employee of a supermarket.

Lifestyle is another factor. Drug abusers, smokers, and heavy drinkers will pay more than those without such vices.

In health insurance or any type of insurance, it is all about calculating the risk or the possibility of loss. When an individual purchases insurance, risk is then transferred to the insurer. The insurer must then calculate to a certain degree, the number of losses that may occur. Since insurance companies cannot accurately predict these losses, they employ the law of large numbers to somewhat predict the number of losses within a group. Also, they employ actuaries who apply math formulas to evaluate different applications in order to determine the risk levels of potential policyholders. The more of a risk an individual is, the higher the insurance premium.

Although these factors are generally the same for all insurers, the companies will execute different priorities or weightings for each of the above mentioned factors. This is why rates from one insurer to another will differ.

Health insurance is after all a business; therefore, part of the cost of insurance premiums is also determined by the money spent on marketing, advertising, and administration. All factors of business will be factored into the insurance premiums of policyholders. In addition, the company may also invest a portion of the insurance premiums in different investment vehicles. How these investments will perform is another factor used in calculating future insurance premiums.