How are Health insurance premiums calculated?

How are Health insurance premiums calculated

So, how actually are health insurance premiums calculated? But first, let’s understand what is health insurance and why do we need it?

Health has always been the most critical issue of our lives, but it has gained much more value in the year 2020. Thus, the need for health insurance.

Basically, the premiums that the insurer gives are the health insurance. These premiums shield the insurer from expenses during medical emergencies. It provides the people with much needed financial backup, without affecting the pockets at once.


How does Health insurance work?

The insurance companies determine the amount of premium the insurer needs to pay, which is dependent on the age, health, and income status, along with various other factors.


How is the insurance premium calculated?

Calculating the health insurance premiums is a complicated process. The premiums depend on everybody’s health, age, and income status, making it different for everybody.

There is a broad range of factors that go while deciding the premiums of these health insurance policies. These guidelines are generally specific for each company, irrespective of the geographical location. But other than that, there is a myriad of factors responsible for deciding the premiums. Before going for a particular insurance policy, one should read the terms and conditions properly, and get into a contract with the insurer.

But the main point over here is how the health insurance premiums are calculated? Here, we are listing some of the top factors that help in deriving the number of premiums.


#1: Marketing and administrating expenditure

There are so many policymakers, that one has to be sure that the insurance companies are not fake. Policymakers put in too much effort and resources to draft a particular policy. Common people pay for these expenditures through their premiums. The costs are like,  designing health insurance policy, cost of marketing, the commission of brokers, advertisements, etc.

The revenue received through selling insurance policies covers these costs, making it a necessary factor while deciding the premiums for the policyholders.


#2: Savings

Even insurance companies save and invest in other companies. The amount of premiums are based on returns of these capitalizations as the companies do not invest in the public sector but in the government sector. The country’s insurance regulatory body makes particular guidelines for investing during this process.

Thus, it becomes one of the most important factors while deciding the premiums for the policyholders.


#3: Medical Underwriting

The third factor in how the health insurance premium is calculated is medical underwriting. Medical underwriting is the use of the information provided by the potential policyholder to analyze and evaluate the applicant for the policy and the coverage. This is probably the main factor that affects the calculation of health premiums. Medical underwriting strikes a balance between individual and group policies. The coverage providers or the insurance companies study the risks involved in giving coverage to the potential policyholder. The analysis report, along with the result, states whether the insurer qualifies for the coverage or not. And what are the involved risks if they qualify?

This is an essential step from the company’s point of view as it helps them in predicting the possibility of losses that may occur due to the wrong decision.


#4: Rate of Mortality

The rate of Mortality is the cost that the insurance company suffers in case of any emergency to the policyholder. This expense differs from person to person. This calculation takes into account the past health conditions, income status of the potential health insurer and is generally high for the older customers.

Also read: How Pre-Existing Conditions Affect Health Insurance?

E.g., the premiums are high for older people and people suffering from hereditary diseases like heart problems and diabetes. In such cases, the insurer is very likely to get ill, and there are more chances that the insurance company may face the cost of providing coverage to the patients.


#5: Community Rating

Another vital factor in how the health insurance premium is calculated. Community rating considers a vast range of factors like the geographical area of the insurer, political stability of the region, economic development in the area, and much more.

This helps in predicting the income level of the insurer and the future of the same so that the companies can predict the income status in the current times and the future.


#6: The type of plan you opt for

While calculating the premiums for a health insurance policy, the type of plan you opt for plays a significant role. The individual policies are much more expensive as compared to the family health insurance policies of group policies.

We keep this factor in mind when we calculate the premiums.


#7: Co-payment and Deductibles

There are different types of policies available to everybody. Each policy has its terms and conditions and keeping them in mind, insurance companies calculate the premiums. Some policies state that in case of an illness, the patient will have to bear a certain percentage of the treatment, making it a co-payment. But with the deductibles clause added, the premiums are much less as compared to other situations.

Read Also: How to Choose a Health Insurance Policy?

All of these have an essential role while deciding the premiums for insurance policies.



Thus, healthcare is expensive throughout the world. And with the diseases rising and inventing themselves as in the case of a novel coronavirus, the need of the insurance policies are increasing drastically. Reports suggest that it will grow more than ever in the post-pandemic world. Poverty all around the world is a big concern, but insurance policies are probably the best way to fight the uncertainties of life.

The premium payment plays a vital role during the decision if a person is ready to opt for health insurance policies or not. So the companies should keep in mind the premiums as minimal as possible.

At last, these companies are working towards the betterment of society and some companies you can head towards are United Health, Anthem, etc.

So, this was all in our guide to how are health insurance premiums calculated. If you still have any queries or suggestions, please mention them in the comments below. We will reply ASAP.