If you have an insurance policy, you might wonder how companies calculate your insurance premiums. You pay insurance premiums for policies that cover your health—and also your car, home, life, and other valuables. The amount you pay is based on your age, the type of coverage you want, the amount of coverage you need, your personal information, your zip code, and other factors.

When you have an insurance policy, the company charges you money in exchange for that coverage. That cost is known as the insurance premium. Depending on the insurance policy, you might pay the premium each month or on a semi-annual basis. In some cases, you might be required to pay the full amount upfront, before coverage starts.

Most insurance companies offer a variety of ways to pay your bill, including online options, automatic payments, credit and debit cards, checks, money orders, cashier’s checks, and bank drafts. You may qualify for a discount if you sign up for paperless billing options or if you pay the full amount all at once instead of making minimum payments.

There’s no set cost for insurance premiums. You could have the same car as your neighbor and end up paying more (or less) for insurance—even with the exact same coverage. It pays to shop around and compare prices and policies.

You’ll pay more for “better” coverage. For example, a health insurance policy with a $1,000 deductible will be pricier than one with a $5,000 deductible. Similarly, a car insurance policy with a $0 deductible will be more expensive than a policy with a $500 one, all other factors being the same.

Still, that doesn’t mean you should automatically go for the cheapest policy, just to save money. It’s essential that you consider your situation—and the likelihood that you’ll need to use that policy—when choosing the plan that will work best for you.

Insurance companies consider several factors when calculating insurance premiums:

• Your age. Insurance companies look at your age because that can predict the likelihood that you’ll need to use the insurance. With health insurance, younger people are less likely to need medical care, so their premiums are generally cheaper. Premiums increase as people age and have a higher chance of needing more medical services. And teenage drivers are still working on building experience, so they’re more expensive to insure. Likewise, older drivers—who tend to have slower reflexes—will also pay more.
• The type of coverage. In general, you have several options when you buy an insurance policy. The more comprehensive coverage you get, the more expensive it will be. For example, if you have an auto insurance policy that covers liability only, it will be cheaper than if you have a plan with collision, comprehensive, liability, medical payments, and uninsured/underinsured motorist coverage.
• The amount of coverage. The less coverage, the cheaper the premiums—no matter what you’re insuring. If you buy health insurance, for example, you’ll pay lower premiums for the same type of coverage if you have a higher deductible and higher out-of-pocket maximum. Similarly, it will cost more to insure a $400,000 home than a $200,000 home.
• Personal information. Depending on the type of insurance you’re shopping for, the insurance company may take a close look at things like your claims history, driving record, credit history, gender, marital status, lifestyle, family medical history, health, smoking status, hobbies, job, and where you live.

Insurance companies are all about risk assessment. The higher the risk, the higher the premiums. Still, there are ways to lower your premiums.

One way is to “bundle” your insurance. For example, if you have your auto, home, and life insurance policies with one company, you’ll probably qualify for a discount.

Of course, you can save money if you reduce your coverage (e.g., increase your deductible); however, that’s not always a good choice. Consider your situation and the likelihood that you’ll use the policy before making any decisions.

There are other ways to save on your premiums, too, but they take more of a commitment. For instance, most states charge smokers up to 50% more than non-smokers for health insurance policies. That means if you’re a smoker paying $600 a month for health insurance, you could bring that down to $400 if you quit smoking.

Another example: You may qualify for lower auto insurance rates if you improve your credit score. That’s because people with lower credit scores are, statistically speaking, more likely to be in an accident.

Whether or not you bundle your insurance, quit smoking, or improve your credit score, it always pays to shop around. That way you can find the best insurance policy at a price you can afford.