Life insurance policies have become a necessity, there are people who take insurance as sort of a savings account- where they aim to accumulate cash and then use that in their lives or claim against their health checkups, car accidents or home repairs.
But everything comes with a price. And in insurance, the price is called premiums. Let’s get into further detail.
Table of Contents
What is a Premium In Insurance?
Premiums are the cost of buying insurance. Whether it is life, health or even auto insurance, the policyholder buys the amount of coverage he thinks is suitable and affordable. Against that coverage, he is required to pay a (usually fixed) amount of premiums each month or annually- depending upon the nature of his policy.
What is a Premium in Health Insurance?
Paying for health in this country is no joke, even a regular health checkup can cost you a couple of hundred dollars. Since medicine is so expensive today, more and more people resort to health insurance. Health insurance is a way of buying upfront coverage that you can use when you need it: for treatments, surgeries, checkups, illnesses etc.
To keep your health insurance policy in force, you need to keep paying your premiums so that when you want coverage, the insurance policy can pay the amount. If you don’t pay your premiums, the policy will eventually lapse and you won’t be covered anymore.
Premiums are not the only expense you incur to receive medical care. Even after paying your monthly fee, you may have to pay out-of-pocket expenses based on the amount and type of care you receive. These include:
- Deductibles: The amount of the medical bill you have to pay before your insurance starts paying claims.
- Copays: A fixed amount you have to pay for expenses such as doctor visits and prescription drugs at the time of service. The insurance provider pays all, or part of, the remaining amount.
- Coinsurance: Determined by a percentage, this is the amount that you pay AFTER paying the deductible amount. Usually the percentage split is 80/20- meaning that whatever amount is left after paying deductibles, the remaining will be split: 20% will be paid by the insured, and 80% by the insurance company.
What is a Deductible in Insurance?
A deductible amount is one of the health insurance components. The amount is set when you’re buying a health plan initially, and you usually start with the deductible amount of $1000 and up. This is the amount you will pay on the medical bills BEFORE the insurance company starts offering you coverage. So if your total medical expense is $1200, you will pay the first $1000 and the insurance company will pay the remaining $200.
The higher your deductible, the lower your premiums. And vice versa. Many people set the lowest deductible possible because having to pay the least amount up front, but that means the monthly premiums are going to be relatively higher.
Is it still wise to go for a health insurance plan with no deductible?
If you’re someone who has frequent doctor visits and lots of routine checkups, having a low deductible health plan will be a good option. This means you don’t have to cover any minimum cost yourself before the health insurance company starts paying off your expenses.
But if you’re a healthy individual who may not get severely hurt during the course of the policy, you should pick a high deductible health plan. Why? So that you can keep paying very low premiums until the end of the policy.
There is also a no-charge after deductible feature which says that once you have exhausted all of the deductibles during the year, all other injuries or medical expenses will be 100% covered (for the course of that year only).
Types of Premium
There are several different types of premiums that a policyholder may come across, and it solely depends on the kind of policy you have. Payment can either be done monthly or annually, depending on the insurance company.
The type of premium is decided based on the policyholder’s age, medical condition and other personal information, the amount of coverage they want etc.
Fixed premiums: These kinds of premiums stay fixed- or leveled- throughout the life of the policy.
Flexible premiums: In these premiums, policyholders have the option to make changes when the policy changes.
Are Life Insurance Premiums Tax Deductible?
Life insurance premiums are tax deductible as a business related expense. This pans out in a way that the insured should be an employee of the company or works as a corporate officer of the company. Moreover, the company should not be a direct or an indirect beneficiary of the policy.
The death benefit that is given to the beneficiaries of the policy is often tax-deferred, which sides as a major plus point for people to opt for a life insurance policy.
Are Health Insurance Premiums Tax Deductible for Retirees?
The medical expense tax deduction covers the cost insurance of premiums, long-term care insurance premiums, and Medicare. Basically all restoratively essential costs endorsed by a doctor are charge deductible.
This implies that if your primary care physician advised you to add a humidifier to your home warming and cooling framework to alleviate your breathing issues, the gadget could be somewhat deductible. Travel costs to and from clinical medicines are deductible.
You are able to deduct 20 cents per mile for medical needs travel. The expense of in-home consideration can be deducted in case you’re persistently sick and the consideration is recommended by your primary care physician.
Deductible uninsured clinical expenses can incorporate everything from an additional pair of eyeglasses, a request for contact focal points, dentures, portable amplifiers, or prosthetic limbs. Substance misuse treatment costs, for example, liquor and drug rehabilitation programs, are potential ordered derivations, as is laser vision corrective surgery.
If you itemize your deductions, medical and dental expenses are deductible from your income taxes on Schedule A of your tax return. However, they are subject to a limit. The limit is 7.5% of a taxpayer’s adjusted gross income (AGI) for 2019 and 2020. This means that only those expenses in excess of 7.5% of a taxpayer’s AGI are deductible. For example, if someone’s AGI is $100,000, only those medical and dental expenses above $7,500 (7.5% x $100,000 = $7,500) would be deductible. The limit increases to 10% of AGI in 2021.
How to calculate Insurance Premium?
To calculate your insurance premiums, there are several factors that need to be considered while doing so. According to your particular policy, the insurance company will keep in mind these aspects before deciding on a premium:
Your age: Young people get lower premiums
Amount of coverage: Low policy coverage will amount to lower monthly payment of premiums
Type of coverage: As to how much benefit you’re receiving with the policy- is your auto insurance also covering collision and comprehensive or is it just partial coverage? More coverage will lead to higher premiums.
Deductibles: A high amount of deductibles set will lead to a lower amount of premiums each month.
Personal information: Your credit history, previous insurance records, health and income are all that are considered while deciding premiums.
When all of these factors are considered to calculate an insurance premium, the policyholder is then required to pay the premium until the end of the policy to keep it in force. If you stop paying premiums, the insurance company will give you a grace period of 12 days to pay. If you don’t pay during that grace period too, your policy will be automatically cancelled and you won’t be covered anymore.
When a person has hundreds of other expenses lined up for the month, paying a high amount of premium can really shake your budget. In such circumstances, knowing the financial condition of your family, you would want to opt for a low premium health plan. So if in a situation that you’re met with a tragedy, the insurance company will take charge after you’ve paid the deductible.
There are ways that you can work on lowering your monthly premiums by having a high amount of deductible or having a low coverage amount overall. Moreover, shopping around for the best policy is very important- you should have gone through a couple of options before you finalize on the one that suits your needs and your budget.
To keep the policy in force, the trick is to be regular in paying your premiums, otherwise, the policy will automatically cancel itself and you won’t be covered for any sort of claim any longer.