What is an insurance premium and how do I pay less? | moneyfacts.co.uk

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Michael Brown

Content Writer
Published: 27/06/2022

When comparing two insurance policies, one of the first things to look for is the quoted premium. Below we have explained what an insurance premium is, how it is calculated and taxed. Bear in mind that you need to make sure any insurance you take out covers all your needs and you shouldn’t take out unsuitable cover just because it is cheap.

What is an insurance premium?

An insurance premium is the amount you pay an insurer to obtain cover. This can be a monthly, yearly, or once-off payment and the final price will depend on a range of factors.

Each quoted premium will be different, as providers have different ways of calculating your risk assessment.

How is my life insurance premium calculated?

Life insurance premiums will predominantly use your age and medical history to determine your life insurance premium. Habits such as smoking or excessive drinking can increase the risk to your health and increase your premium.

Another significant factor which determines your premium is the amount of time you will be covered by the policy.

Whole life insurance policies, for example, will require a smaller regular premium the earlier they are taken out in your lifetime. This is because this product is designed knowing it will make a pay-out in the future, so the longer you hold the policy the cheaper it becomes as the provider can recoup their money over a longer period.

Alternatively, other life insurance products might charge you more for a longer period of cover. This is because the longer the policy’s term, the greater chance the insurer will have to pay out your sum.

How is my car insurance premium calculated?

Again, age plays a factor in determining your car insurance premium. While it pays to be younger for a life insurance premium, being an older driver can count in your favour when calculating your car insurance premium.

Older drivers are typically “experienced” and less likely to be involved in an accident, which lowers the insurer’s risk. Other factors which will also influence your premium are your driving record and the type of vehicle you drive. If you have penalty points on your licence then this can raise your premiums.

Meanwhile, more expensive vehicles will command a larger premium, while second-hand cars which have lost some of their value can be cheaper to replace, and therefore cheaper to insure.

How is my home insurance premium calculated?

The cost of home insurance depends on the size and construction of your home, your location, the extent of the cover you want and your previous claim history, to name a few conditions.

However, insurers often offer premium discounts if you have gone a long period without a claim, if you live in a Neighbourhood Watch area and if you have increased security such as British Standard door and window locks and an alarm.

How is my travel insurance premium calculated?

This premium will depend on how long your holiday is, where it is taking place, and what is included in your cover. If you intend on jetting to a high crime city, then naturally your policy will be higher than a safer alternative.  

In addition, the items you take on holiday and what you plan to do can also influence your premium. Golfing holidays, which involve expensive equipment, might be required as an add-on to your premium, and higher-risk activities like quad biking or scuba diving will also require extra cover.

Can my premiums go up or down?

Since your insurance premiums are calculated according to a unique set of information, they can increase or decrease in price. The price change usually occurs when it is time to renew your policy.

For example, if you take out a car insurance policy and do not claim over a period of five years then your provider may decrease your premium.

In the same example, if you have been involved in an accident or been a victim of car theft then your premium will increase because you will be perceived as higher risk.  

Otherwise, if you renegotiate your excess when it is time to renew your insurance policy, this can also change your quoted premium. 

Do I get a cheaper premium if I pay annually?

Some insurance policies are cheaper when they are paid on an annual basis compared to their monthly alternatives.

For policies which need consistent coverage, such as vehicle insurance, it could be manageable for consumers to afford this on a monthly basis. However, monthly costs come with further admin and interest fees, which are factored into your monthly prices.

Are my premiums taxed?

Instead of Value Added Tax (VAT), insurance premiums include Insurance Premium Tax (IPT) which is priced into the quoted premium you first receive.

While VAT is standard across all products, the IPT on your premium will differ according to the type of insurance you have taken and your provider. Policies such as car, pet and home insurance will receive a standard rate IPT of 12%. Meanwhile, other types of insurance policies, such as travel insurance, have a higher rate IPT of 20%.

While IPT cannot be claimed back, it is not included on life insurance and other income protection insurance products.

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.


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