There are several factors that can determine your health insurance premium on an individual health insurance product. The premium equation typically looks like this: Base Rate x Area Factor x Underwriting Factor x Tobacco Factor x Modal Premium Factor
Let’s take a look at each piece of the premium equation and its impact on the overall premium. The first piece of the equation is the base rate. This is the rate established by the insurance company based on projected claim costs by age and gender. Also included in the base rate are things like administrative expenses, profit, and premium taxes. Different base rates can be established based on benefit levels such as deductible, coinsurance, co-payments, etc.
The base rate is then multiplied by the area factor. Area factors are used to adjust for higher or lower claim costs based upon medical costs and medical utilization by area. These areas can be as broad as state based and as narrow as a three digit zip code area.
Underwriting factors are the next factor in the premium equation. Underwriters look at past health conditions based on information contained on the insurance application and information obtained through medical records and paramedical exams. Health conditions are assigned debits based upon statistical analysis of past claims to determine an appropriate health rating classification. Height and weight charts are also typically assigned debits by category and impact the debit total assigned to a proposed insured. These debits are added together to determine whether someone is a preferred, standard, or substandard risk, and the corresponding rating factor is assigned.
Tobacco factors are the fourth part of the equation. Depending on how the base rates were set up (smoker versus non-smoker) this factor will either reduce or increase premiums from the base rate table.
The final factor is the modal premium factor. Monthly, quarterly, semi-annual, and annual are typical modes premiums are paid in and each is assigned a factor. Some companies will give a discount off the monthly mode if an automatic bank withdrawal option is selected.
Let’s now look at how it all comes together. An example of the above equation would be a 25 year old male interested in a $500 deductible health insurance policy. The sample base rate for this individual is $100. The area factor where he lives is .90. He is very healthy and can be issued as a preferred risk, and the insurer has assigned a .80 factor for preferred risks. He doesn’t smoke and the insurer built their standard base rates on a non-smoker basis, so his factor in this case is 1.0. Finally, he decides to pay quarterly and the insurer has assigned a factor of 3.0 to establish a quarterly rate.
The equation then looks like this: $100 x .90 x .80 x 1.0 x 3.0 = $216 per quarter