How Are Health Insurance Premiums Calculated?

Lindsay Frankel
Written byLindsay Frankel
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Lindsay FrankelInsurance Writer
  • 5+ years in auto insurance and personal finance writing

  • Featured in top personal finance publications

Lindsay is a widely published creator of auto insurance content. She also specializes in real estate, banking, credit cards, and other personal finance topics.

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Katie Powers
Edited byKatie Powers
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Katie PowersAuto and Life Insurance Editor
  • Licensed auto and home insurance agent

  • 3+ years experience in insurance and personal finance editing

Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.

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Updated February 9, 2023 at 11:00 AM PST

Reading time: 4 minutes

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Under the Affordable Care Act (ACA), health insurance companies can only consider a handful of factors when determining your individual health insurance premiums. When you purchase health insurance on the ACA marketplace, personal factors like your age, location, and tobacco use will determine your rates, along with your choice of plan and whether you enroll as an individual or with dependents.[1] 

For small group health insurance, combined premiums for each employee using the same factors determine rates. Insurers use many additional factors to set premiums when underwriting plans for a large group.

How insurers calculate premiums for group health insurance

Businesses generally need 50 or more employees to qualify for a large group plan. Large employers may negotiate with insurers to secure the best premiums and coverage for their workers, so large group health insurance generally costs less per person. Health insurance providers consider the following factors when establishing group health insurance premiums for large employers:

  • Average age of employees

  • Gender of employees

  • Location of the business

  • Employment sector

  • Prior claims history

  • Size of the group

  • Coverage choices

  • Deductible choices

  • Additional benefits and add-ons

A construction company in a busy urban area will likely have higher premiums than a retail store in the suburbs. And a business that wants to offer a low-deductible PPO with dental and vision will pay more than a business offering more limited coverage.

Good to know

The ACA prohibits insurance companies from using the health status and medical history of plan participants to determine premiums.[2] It’s illegal for companies to charge higher rates because women in the group are pregnant, for example.

See More: What Is the Affordable Care Act?

How premiums for small groups are calculated

To qualify for small-business health insurance through the Small Business Health Options Program (SHOP), businesses generally must have one to 50 employees, though some states allow larger groups.[3] Unlike with large group plans, the employment sector of the company and past claims don’t influence insurance premiums for small groups. Instead, insurers calculate premiums based on the following factors:

  • Business location

  • Age of employees

  • Tobacco use of employees

  • Number of employees and dependents

  • Coverage choices

Important Information:

The Affordable Care Act prohibits small group health insurance providers from denying coverage or increasing premiums based on pre-existing conditions. An insurer can’t raise monthly premiums for enrollees with disabilities, for example, or cancel an insurance policy because someone falls ill.[4]

See Also: Do I Need Health Insurance Coverage?

How ACA marketplace premiums are determined

Similar to small group premiums, the following factors determine individual health insurance premiums for exchange plans:

  • Age

  • Location

  • Tobacco use (in most states)

  • Enrollment type (individual or family)

  • Plan type (metal tier)

States may determine how much these factors can affect premiums. Plans are categorized into five metal levels:

  • Platinum: Highest premiums for low deductibles and low costs when you need healthcare

  • Gold: High premiums for low deductibles and low costs when you need care

  • Silver: Moderate premiums for moderate deductibles and moderate care costs

  • Bronze: Low monthly premiums with high deductibles and high medical care costs[5]

  • Catastrophic: Lowest premiums for very high deductibles and care costs; only available to people under 30 or those with a hardship exemption; premiums can’t be reduced with a premium tax credit

These metal tiers dictate how you and your health insurance provider share medical expenses. See how the tiers compare below.

Plan CategoryCosts Covered by Health Insurance CompanyCosts Paid by Policyholder

How to lower your health insurance premiums

When buying health insurance on the marketplace, you have a few ways to keep your costs low:

  • Take advantage of the premium tax credit. Depending on your household income and family size, you may qualify for a premium tax credit that reduces your premium. Generally, your income must fall between 100% and 400% of the federal poverty level for eligibility, but some exceptions exist. You can find out if you’re eligible by visiting and completing a marketplace application.[6]

  • Choose a bronze or silver plan. Bronze and silver plans come with lower premiums, but costs will be higher when you need care. However, if you choose a silver plan, you may also be eligible for cost-sharing reductions based on your income, which lower your out-of-pocket costs.

  • Compare plans. Depending on the healthcare services and medications you regularly use, some plans may provide better value than others. Choosing a higher deductible and an HMO can keep your premiums low, and you can combine a high-deductible health plan with a health savings account to help lower out-of-pocket costs.

The same strategies apply when choosing a private, off-exchange medical insurance plan or selecting from your employer-sponsored options. Choose a plan with a high deductible and pair it with a health savings account to keep your premiums low. You may also qualify for a premium tax credit on a marketplace plan if your job-based insurance offer qualifies as unaffordable.

Learn More: Are Health Insurance Premiums Tax Deductible?

Health insurance premium calculation FAQs

Navigating the world of health insurance can be complicated. Find answers to some common questions people ask about health insurance premiums and how they’re calculated.

  • What are the three most important factors in health insurance calculations?

    The key factors health insurance companies consider when setting your premiums include your age, location, and tobacco use. Additionally, your choice of plan category will affect your premiums.

  • Will a higher premium mean better insurance coverage?

    The quality of care you receive will be consistent regardless of the plan category you choose. But plans with higher premiums generally have lower out-of-pocket costs when you need care. The deductibles, copays, and co-insurance cost less with higher-premium plans.

  • What are tobacco premium surcharges?

    Under The Affordable Care Act, insurers can legally charge up to 50% more to policyholders who use tobacco products. Some states have more restrictive limits on tobacco premium surcharges, and a handful of states prohibit companies from considering tobacco use when setting premiums.[7]

  • How much does health insurance cost per month?

    The average monthly premium for a marketplace plan in 2022 was $594 before premium tax credits, according to the Kaiser Family Foundation.[8] But costs vary widely by location and other individual factors. For people with employer-sponsored group coverage, the typical employer contribution was 80% for individual coverage and 67% for family plans. For family health coverage, workers contributed an average of $509 per month in 2022.[9]

  • Why do health insurance premiums increase every year?

    Health insurance rates increase due to rising medical costs. They also increase based on the collective claims filed in the previous year. But health insurance companies can’t raise your premiums more than once per year, unless a law requires a new benefit.


  1. "How insurance companies set health premiums." Accessed February 6, 2023
  2. Congressional Research Service. "Federal Requirements on Private Health Insurance Plans." Accessed February 6, 2023
  3. "Overview of SHOP: Health insurance for small businesses." Accessed February 6, 2023
  4. "Health insurance rights & protections." Accessed February 6, 2023
  5. "How to Pick a Health Insurance Plan." Accessed February 6, 2023
  6. "Saving money on health insurance EmailPrint." Accessed February 7, 2023
  7. National Library of Medicine. "State policies limiting premium surcharges for tobacco and their impact on health insurance enrollment." Accessed February 6, 2023
  8. Kaiser Family Foundation. "Marketplace Average Premiums and Average Advanced Premium Tax Credit (APTC)." Accessed February 6, 2023
  9. Kaiser Family Foundation. "2022 Employer Health Benefits Survey." Accessed February 6, 2023
Lindsay Frankel
Lindsay FrankelInsurance Writer

Lindsay Frankel is a content writer specializing in personal finance and auto insurance topics. Her work has been featured in publications such as LendingTree, The Balance,, Bankrate, NextAdvisor, and FinanceBuzz.

Katie Powers
Edited byKatie PowersAuto and Life Insurance Editor
Photo of an Insurify author
Katie PowersAuto and Life Insurance Editor
  • Licensed auto and home insurance agent

  • 3+ years experience in insurance and personal finance editing

Katie uses her knowledge and expertise as a licensed property and casualty agent in Massachusetts to help readers understand the complexities of insurance shopping.

Featured in

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