What Determines the Cost of a Health Insurance Premium?

Some factors that determine the cost of your health insurance premium are fairly obvious, such as the cost of doctor visits and hospitalizations. But several behind-the-scenes calculations also are used to figure out how much you'll be charged.

Services

• The types of medical services and procedures your plan covers and the costs associated with them have a direct impact on the premium. The more your plan covers, the more expensive your premium will be.

Risk

• Insurance companies employ actuaries, who use math to evaluate applications and determine the risk levels of the applicants. The more of a risk you are to the insurance company, the higher your premium. Your risk level is determined by any pre-existing conditions or other health issues you may have (e.g., high blood pressure, smoking).

Type of Plan

• Group insurance coverage costs less than individual coverage, because the insurance company's risk is spread out over many people rather than being concentrated in an individual or a family. The company can be confident that a percentage of those covered under a group plan will be in generally good health and won't be costly to insure. Also, the premiums paid by healthy group members will cover the cost of those less healthy.

Marketing and Administration

• Part of the cost of a health insurance premium is determined by the amount of money the company spends on advertising, marketing, sales agents and administration. All of these aspects of doing business are factored into your premium.

Profit and Investments

• Insurance companies are for-profit ventures, so a profit margin is built into your premium. Also, if you're healthy and don't require medical services or procedures, the company can invest a portion of your premiums in interest-bearing or other investment vehicles. The performance of these investments is a factor in determining future premiums.