Insurance Premiums and Deductibles - Explained


An insurance policy is a contract between you and your insurer regarding the terms, conditions, coverages, exclusions and obligations of coverage.

Understanding the nuts and bolts of your policy can be quite valuable. However, it’s important to start by breaking down the basics.

Here, we will be looking at insurance premium and deductible, what they are, and ultimately how they work.

Insurance Premium

What Is Insurance Premium?

In the simplest of terms, the premium is the amount of money an insurance company charges you for the policy you are purchasing.

At the end of the day, insurance costs money. The premium is essentially the cost of your insurance.

How Insurance Premiums Work

Insurance premiums typically work off of a calculation determined by the insurance company.

Then, based on your personal information, location, and more, you will have discounts added to the base premium. Insurance discounts can help to reduce the cost of your premium overall.

Premium is often paid on either an annual basis but may be split into multiple payments.  

What Factors Determine the Premium Amount?

The dollar amount will vary depending on the type of coverage you are looking for, as well as the risk associated. Often the risk will fluctuate from person-to-person.

Here are some of the key factors that will determine your premium.

1. Type of Coverage

There are typically different coverage options offered when you purchase a policy. Here’s a good rule-of-thumb to follow - the more coverage you get, the higher your premium may be.

For example, if you purchase all-risk coverage for your boat insurance policy, it will protect you from a vast number of perils associated with owning watercraft. This level of coverage may protect your boat, trailer, and other insured property for accidental physical damages like fire, theft, collision, storms, trailering, and more.

Such a comprehensive policy will likely be more expensive than one that only provides liability coverage. 

» RELATED: Boat Insurance – What It Is and What It Covers

2. Amount of Coverage

As mentioned earlier, when purchasing an insurance policy, you will likely pay more premium for higher amounts of coverage.

Let’s take a look at an example: 

Insurance for a boat valued at $25,000 will likely cost less than for one valued at $100,000. Here, the amount of coverage relies on the dollar value for what you’re insuring. It’s all pretty simple – the more dollar value insured, the more expensive the premium.

There’s also a scenario where you could pay less money for the same level of coverage, if you take a higher deductible. This is where it gets a little more complicated.

Let’s explain:

You can save on the premium by increasing your deductible. So, let’s say you are looking for ways to significantly decrease your annual premium. Increasing your deductible from $500 to $1,000 may allow you to do so.

3. Personal Risk Factors

The cost of the premium relies heavily on your personal risk factors. Things like your boating loss history, location, level of experience and more will play a major factor when determining risk.

These insurance company will use these factors along with the other information on your application to determine the premium amount that you will be charged. Every insurance company and applicant is different. Much of the cost will depend on the situation at-hand.

In fact, some of these things will also translate into specific discounts on the policy premium. With boat insurance, for example, you could have significant savings if you choose to lay-up your boat for the winter or operate in a limited territory.

» MORE: How Much Does Boat Insurance Cost?

Insurance Deductibles

What Is an Insurance Deductible?

An deductible is essentially the amount you agree to self-insure before the policy begins to pay for damages to your insured property arising from a covered loss. You agree to self-insure the amount of any applicable deductible at the time you purchase a policy.

In other words, it’s the amount that you are responsible for paying. A deductible is typically a flat dollar amount, although it may also be presented as a percentage of the insured value.

When filing a claim, once you pay the deductible, the insurance company will begin paying its portion of the insured loss (up to the policy limits and conditions written into the agreement). This amount will vary depending on the details of the plan.

For example, let’s say your boat sustained $5,000 worth of damage and you have a $1,000 deductible. You will be responsible for the first $1,000 and your policy will pay for the remaining $4,000. 

» MORE: A Guide to Boat Insurance Claim

How an Insurance Deductible Works

When purchasing a policy, you are protecting yourself and your finances from unforeseen risks that come in the form of damage or loss. Your deductible is a piece of that puzzle.

While the insurance company agrees to pay for a covered loss, you are also agreeing to pay the first part of it – your deductible).

Keep in mind - there’s a huge difference between paying the first $500 or $1,000 (or whatever your deductible is) versus paying the entire bill. 

How Much Is an Insurance Deductible? 

Similar to the premium amount, deductibles vary depending on a number of different factors.

Though, as the person buying the policy, much of the cost will be a choice between how much you’re willing to pay out-of-pocket for a claim versus how much you’re willing to pay toward the premium every year.

This is where you will evaluate your own risk. The higher amount you are willing to cover via the deductible will translate to less risk for the insurance company and vice versa. Essentially, you are coming to an agreement with the insurance company, balancing the financial risk between each party.


  • The premium is the amount of money paid upfront for the insurance policy.
  • The deductible is the amount the insured is responsible for before the policy kicks in during a covered claim.
  • The cost of insurance will vary based on your plan, a variety of personal factors, the type of coverage you are seeking, and more. 

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