What is Insurance Expense?
Insurance expense, also known as Insurance premium, is the cost one pays to insurance companies to cover their risk from any kind of unexpected catastrophe and is calculated as a set percentage of sum insured and is paid at regular pre-specified time period.
Insurance Expense Formula
1 – For Life Insurance
2- For Insurance other than Life
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For eg:
Source: Insurance Expense (wallstreetmojo.com)
Examples of Insurance Expense
Example #1
In a manufacturing concern, generally, 2.89% of the asset value is needed to be paid as an insurance cost. From the below value of the assets, calculate the Insurance expense to be paid by XYZ Limited:
- Machinery: $9000000
- Industrial Shed: $123100
- Spares: $45000
- Forklift: $32000
- Safety Equipment: $18500
- Total: $9218600
Solution
Calculation showing Insurance Cost to be paid for Machinery
- =9000000*2.89%
- =260100.00
Similarly, we can calculate Insurance Expense for other assets which are shown below,
Total will be –
Thus, for the given year, XYZ Limited will have to pay $ 2,66,417.54 as an insurance premium.
Example #2
Anthony is having an age of 23 years. He has a habit of smoking. He is presently studying Masters from Boston University. His father is interested in taking the insurance of Anthony’s health due to his bad habit of smoking. He consulted the PQR insurance company for taking medical insurance. PQR Insurance company provided the following details related to mediclaim plan:
| Age | 0-15 | 16-24 | 25-50 | 51-70 | 70 and above |
|---|---|---|---|---|---|
| Base Premium Rate for Mediclaim | 1.30% | 2.01% | 2.19% | 2.70% | 3.50% |
| Additional premium to cover a specific illness | 1% | 1.20% | 1.50% | 1.70% | 2% |
| Additional premium if smoking | 0.50% | 0.65% | 0.80% | 1% | 1.20% |
Calculate the insurance expense for the mediclaim plan, including coverage of specific illness of $ 500,000, to be paid by Anthony’s father.
Solution
Anthony is having an age of 23 years. Hence all the premium rates will apply to the slab of 16-24 years.
Calculation showing Insurance Expense to be paid
Similarly, we can calculate Insurance Expense which is shown below,
Total Premium to be Paid will be –
- =10050+6000+3250
- =19300
Thus, the total insurance expense to be paid is $ 19,300 for the sum insured of $ 500,000.
Advantages
- Ensures Security – It provides security to the insured about any future wrong happenings in their life or their businesses. This will not only ensure security but will give mental calmness in their life.
- Long Term Financial Safety – It will provide long term financial safety to the insured person and safeguard the personal interest of individuals. Such kind of benefits can be obtained in life insurance.
- Source of Collecting Funds – It gives the opportunity of creating the pool of funds that can be parked at a proper place and can create a steady flow of income, which can be helpful in covering the catastrophe of the insured person.
- Creates a Habit of Saving – It nurtures a habit of insurance among individuals that will ensure judicious cash flowCash FlowCash Flow is the amount of cash or cash equivalent generated & consumed by a Company over a given period. It proves to be a prerequisite for analyzing the business’s strength, profitability, & scope for betterment. read more in a long period of time.
Disadvantages
- Reimbursement Not Equal to Loss – Insurance expense does not guarantee that one will get reimbursement from insurance company equivalent to the loss incurred. Reimbursement of claims is always dependent on various factors. As a result, the majority of times, the loss amount is not getting fully recovered from insurance companies.
- Complexity in Schemes and Clauses – Scheme documents of insurances are highly complex. Moreover, they will put various clauses that will not be known to layman. As a result, an insured person will not be fully aware of all the terms and conditions of the insurance contracts.
- Lack of Trust – In the past, many times, insurance companies have behaved recklessly. As a result, there always exists a somewhat low level of trust over them.
- Limit in the Claim – All the insurance policies will have a fixed sum insured. As a result, if the coverage is of 1 million, and even if an individual incurs the loss of $ 2 million, the insured person will get reimbursement of $ 1 million only. This sum insured many times get wrongly estimated, and as a result, they have to bear the risk.
Conclusion
Thus, insurance contracts are almost inevitable for carrying out a smooth life and business nowadays. If anyone misses taking the insurance, then they are exposed to a huge risk. As a result, they will be facing a severe amount of loss mental and financial. As a result, it is always advisable to incur the insurance expense, considering the risk they are facing and their requirements against the same.
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This has been a guide to Insurance Expense. Here we discuss the formula of insurance expense along with its calculation, examples, advantages & disadvantages. You can learn more about finance from the following articles –
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