Insurance Expense

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

Insurance Expense (Premium) = Sum Insured * % of Premium to be Paid

2- For Insurance other than Life

Insurance Expense (Premium) = Value of Asset * % of the Premium to be Paid
Insurance-Expense

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Examples of Insurance Expense

You can download this Insurance Expense Excel Template here – Insurance Expense Excel Template

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

Insurance Expense Example 1.1
  • =9000000*2.89%
  • =260100.00

Similarly, we can calculate Insurance Expense for other assets which are shown below,

Insurance Expense Example 1.2

Total will be – 

Insurance Expense Example 1.3

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:

Age0-1516-2425-5051-7070 and above
Base Premium Rate for Mediclaim1.30%2.01%2.19%2.70%3.50%
Additional premium to cover a specific illness1%1.20%1.50%1.70%2%
Additional premium if smoking0.50%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

Insurance Expense Example 2.1

Similarly, we can calculate Insurance Expense which is shown below,

Example 2.2

Total Premium to be Paid will be –

Example 2.3
  • =10050+6000+3250
  • =19300

Thus, the total insurance expense to be paid is $ 19,300 for the sum insured of $ 500,000.

Advantages

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.

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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