In insurance, premium refers to the payment you make for benefits coverage. In health insurance, you or an employer pays a premium to a health insurance provider in exchange for certain guaranteed benefits.
Health insurance premiums often are paid on a monthly basis. However, some insurance companies offer discounts if you make more payments in advance, such as quarterly, annually or semi-annually. When employers pay for part of the premiums, the employee's portion normally is deducted pretax from paychecks, and the employer is responsible for making the payments to the insurer.
A number of factors impact the premiums you pay for health insurance. For instance, employer groups typically obtain lower prices relative to what individuals get on their own. The insurance company provides that discount because there is an advantage in acquiring a 500- or 1,000-employee customer base as opposed to an individual customer. In general, rising single and group policy rates were a major factor in the introduction of the Affordable Care Act. As of January 2015, average family premiums were $16,800 per year.
Other factors that affect premiums:
- Risk factors: On individual policies, insurance companies weigh risks of each applicant in assessing premiums. People with compelling health risks, such as smokers or the aging population, may face higher premiums than someone the company considers lower risk.
- Policy usage: Group policies are often negotiated from one year to the next. Usage by group members impact negotiations. Many companies promote wellness to minimize health costs for both the employer and workers.
The Role of Out-of-Pocket Costs
The types of coverage you have also influence your premium cost. More extensive coverage with higher benefits payments leads to higher premiums. According to Healthcare.gov, a policy with higher out-of-pocket costs has relatively low premiums. In contrast, to keep out-of-pocket costs low, you typically pay higher premiums. Out-of-pocket costs include annual deductibles, co-insurance and co-payments.
If you don't expect to use a lot of medical care, you could save hundreds or thousands of dollars per year by choosing a plan with a high deductible.