Demystifying Insurance Premiums: Factors that Influence Insurance Premiums and Tips on Managing Them
Are you unsure whether to make a small claim because it might affect your premiums? Have your premiums gone up and you're not sure why? Or maybe there's been a change in your circumstances, and you’re wondering how it will impact your premiums?
We're here to help explain insurance premiums and share some handy tips for managing them.
Understanding Insurance Premiums
Insurance premiums are the amounts you pay each year to maintain your policy. In return, your insurer provides financial protection or reimbursement against losses from accidents, health issues, natural disasters, or other unforeseen events.
Base Premium
The premium you pay is made up of two parts. The first is a base premium. This is calculated by your insurer to reflect the cover you’ll receive if you make a claim. A range of risk factors are built into this (see below).
There is also a reinsurance cost included. Reinsurance is insurance for insurance companies whereby an insurance company transfers part of the risk to large international insurers who effectively underwrite risk to ensure the funding of claims, particularly in a major event. Insurers need to pay a premium to reinsurers for this portion of the cover. If there are large events which involve many claims, the cost of reinsurance can go up, and this is then passed onto customers. Therefore the cost of reinsurance can also change over time.
Levies and Tax
The second part of a premium includes levies and tax. Levies, such as the Natural Hazards Insurance Levy (NHI) and the Fire and Emergency NZ (FENZ) levy are collected by the government to help fund their operations and claim payments. Natural Hazards Commission Toka Tū Ake provides insured homeowners with cover to help rebuild or repair their homes if they are damaged by a natural hazard event. The FENZ levy is used to help fund the Fire and Emergency service.
GST is also added to your premiums at a rate of 15%, so if your premiums go up, the GST component will also increase.
Not everyone’s premiums are the same. Insurers determine your premiums based on various personal factors. Here, we’ll break down what insurers consider when setting your rates:
1. Type of Coverage
The type of insurance coverage you choose is one of the most significant factors affecting your premium. Comprehensive policies that cover a wide range of risks and offer extensive benefits will typically cost more than basic or limited coverage plans.
2. Age
Age plays a crucial role in determining insurance premiums, especially for health, life, and auto insurance. Older individuals might face higher premiums due to increased health risks and shorter life expectancy. In auto insurance, young drivers often face higher premiums due to their lack of experience and statistically higher likelihood of being involved in accidents.
3. Health
Your health status can also affect your premiums for health and life insurance. Insurers assess your medical history, pre-existing conditions, and lifestyle choices to gauge your overall health risk. Regular health check-ups and maintaining a healthy lifestyle can help in securing lower rates.
4. Occupation
Your occupation can influence your insurance premiums, especially for life, disability, and health insurance. Jobs that involve high-risk activities or environments, such as construction or forestry, can lead to higher premiums. Insurers assess the likelihood of work-related injuries or health issues associated with different occupations when calculating premiums.
5. Claims History
Your history of insurance claims plays a significant role in determining your premiums. Individuals with a history of frequent claims may be perceived as higher risk and may face higher premiums as a result. Maintaining a good claims history can help in securing lower premiums over time.
6. Location
Where you live can impact your insurance premiums, particularly for home, auto, and health insurance. Areas prone to natural disasters or high crime rates can result in higher premiums. For instance, homeowners in regions susceptible to flooding or earthquakes might face higher home insurance premiums.
7. Deductibles
The deductible is the amount you agree to pay out of pocket before your insurance coverage kicks in. Higher deductibles typically result in lower premiums because you assume more of the financial risk. Choosing the right deductible depends on your financial situation and ability to cover unexpected expenses.
Tips for Managing Insurance Premiums
Understanding the factors that influence insurance premiums is just the first step. Here are some practical tips for managing and potentially lowering your premiums:
1. Shop Around and Compare
One of the most effective ways to manage your insurance premiums is to shop around and compare different providers. Consult with your insurance advisor, use online calculation tools, and request quotes from multiple insurers to find the best deal that suits your needs. It’s important to make sure you are comparing policies with the same level of cover when comparing cost, this is something your insurance advisor can help you understand.
2. Bundle Policies
Many insurance companies offer discounts if you purchase multiple policies from them. Bundling your home and auto insurance, for example, can result in significant savings. Review your current policies and consider consolidating them with a single provider to take advantage of these discounts.
3. Maintain a Healthy Lifestyle and Drive Safely
Leading a healthy lifestyle can positively impact your insurance premiums, particularly for health and life insurance. Regular exercise, a balanced diet, and avoiding harmful habits like smoking and excessive drinking can lead to lower premiums. For car owners, maintaining a clean driving record is crucial for keeping premiums low.
4. Increase Your Deductibles
Opting for higher deductibles can reduce your premium costs. However, it’s essential to ensure you can afford the higher out-of-pocket expenses in the event of a claim. Your insurance provider will be able to help you evaluate your financial situation and choose a deductible that works for you.
5. Improve Your Credit Score
Many insurers use credit scores as part of their risk assessment process. A higher credit score can result in lower insurance premiums, as it indicates financial responsibility. Regularly check your credit report, pay bills on time, and reduce outstanding debt to improve your credit score and potentially lower your premiums. If you’re unsure about your credit rating, you can request a copy of your credit report here.
6. Review Your Coverage Annually
Regularly reviewing your insurance policies can help ensure you have the right coverage at the best price. Life changes, such as getting married, having children, buying a home, or changing jobs, can impact your insurance needs. Review your policies with your insurance advisor annually, adjust your coverage as necessary and explore potential discounts or policy updates with your insurer.
7. Maintain a Good Claims History
Avoid filing minor claims that you can afford to pay out-of-pocket. Frequent claims can raise your premiums over time. Instead, reserve your insurance for significant or catastrophic events. Maintaining a good claims history can help keep your premiums lower and may qualify you for claim-free discounts.
Conclusion
Insurance premiums include both a base premium which is paid to your insurance company, and additional levies and taxes which are paid to the government. The base premium is influenced by a variety of factors, from your age and health to your occupation and lifestyle choices. By understanding these factors, you can take proactive steps to manage and potentially lower your premiums. Shopping around, maintaining a healthy lifestyle, and choosing higher deductibles,are just a few strategies to consider.
Plus4 is a nationwide network of registered financial advisers, specialising in personal and business insurances. We focus on understanding your unique circumstances, needs and goals so we can put in place insurance solutions that fully protect everyone and everything that is important to you. Interested in finding out more about how we can help you keep your insurances up-to-date and optimised for your circumstances? Your nearest adviser will be happy to help – you can find them here.