Insurance Premium

Insurance Premium Meaning

Insurance Premium is the amount paid by any individual or a corporate entity to cover themself from uncertain events resulting in heavy economic and non-economic losses. For example, losses could be caused by incidents like theft, forgery, fire, accidents or deaths.

Premiums are predetermined and paid at a regular interval. Insurance mitigates liabilities caused by events which are outside the control of the insurance policyholder.

Key Takeaways
  • An insurance premium is an amount paid by the policyholders to cover themselves against unforeseeable losses.
  • The policyholders make a claim to receive compensation from the insurance carrier in the event of loss, as long as it meets the terms and conditions agreed prior to insuring.
  • In some policies, the policyholder can receive compensation only if it exceeds the deductible amount.
  • The premium amount varies from individual to individual based on risk factors like age, demography, buyer’s history, and deductible amount.

Insurance Premium Explanation

Insurance Premium is the predetermined sum that the insurance policyholders pay. By doing so, it covers the policyholders during any unexpected loss.

The institution providing the insurance is called an insurance carrier, insurance company, or the insurer. The insurance policy is a contract containing the details of the insurance. These details specify the conditions under which the insurer will pay compensation to the policyholder.

Most plans have a deductible copayment. This is a fixed amount paid by the policyholder before being eligible for compensation. Deductibles are aimed at avoiding small and unnecessary claims.

Some plans have an out-of-pocket maximum; it is the maximum amount of money the insured pays out of their own pocket. Beyond this point, the insurance carrier will pay 100% of the cost of care up to any specific limits.

Components

Insurance Premium

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The components of an insurance premium are as follows –

  • Amount Insured
  • Maturity Amount
  • Risks Involved
  • Type of Policy
  • Due Date of Payment of Premium
  • Amount to be received in case of Policy maturing early, i.e., before the date of maturity.

How to Calculate Insurance Premium?

The companies consider the following factors when they calculate the amount of insurance premium.

How to Calculate Insurance Premium

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#1 – Age of the Policy Holder whose Policy is under Consideration

As people get older, they generally need more medical care. Therefore, the fixed premiums are higher for an older person.

#2 – Coverage Needed

The premium amount depends upon the nature of coverage; premiums covering more areas are heftier.

For example, if a policyholder wants to take a car policy without reducing the value of depreciation, then it will cost a higher premium. In contrast, most car insurance policies deduct the value of depreciationDepreciationDepreciation is a systematic allocation method used to account for the costs of any physical or tangible asset throughout its useful life. Its value indicates how much of an asset’s worth has been utilized. Depreciation enables companies to generate revenue from their assets while only charging a fraction of the cost of the asset in use each year. read more from the vehicle.

#3 – Amount Covered

The premium amount depends upon the value of the asset or amount covered by the Policy—the lesser the value of the covered asset, the lesser the premium, and vice versa.

 #4 – Area in which the Policy is Taken

Depending on the type of insurance, the company checks other aspects as well. For example, in health insurance, the insurance carrier will check if the person is living in an urban or rural area. This is because demography plays a role in body diagnostics. Also, some diseases are specific to a location.

Who decides Insurance Premiums?

The insurance companies decide the amount of insurance premium, which is subject to specific terms and conditions. For example, the premium amount depends on factors like competitor value of the premium, the percentage of the claim, policy buyer’s history, policy buyer’s present condition, and the nature of Policy.

The company selling the policy examines these factors in-depth while computing the customised premium amount.

Insurance Premium vs Deductibles

The differences between insurance premiums and deductibles are as follows –

  • Premium is an amount which needs to be paid monthly, quarterly, or annually by the policyholder to continue enjoying the benefit of such Policy. On the other hand, the deductible is an amount which the policyholder pays to be eligible for the compensation given by the insurance company.
  • The premium amount might be returned with benefits upon maturity. But there is no such option with deductibles.
  • Premium amount can be changed based on the Policy and event, but deductibles are the fixed percentages. Deductibles are calculated at the time of insuring.
  • Choosing between a higher Insurance Premium vs higher deductible is all about the specific details of the policy.
  • Higher the deductible, lower the premium amount. Due to this, sometimes, a higher deductible is preferred to save money. On the other hand, when it comes to health care, a plan with a slightly higher premium but a lower deductible might increase savings.

Advantages

Paying premiums has the following advantages.

  • In uncertain events that result in financial or non-financial losses for the policyholder, the insurance company helps recover.
  • The premium paid by the insured can be claimed as deductions from the income for tax purposes.
  • The policyholder can also get loans against such insurance policies as long as the specific conditions are met.

Disadvantages

Paying premiums has the following disadvantages.

  • The premium amount paid by the insurer would be a dead loss if an uncertain event never occurs. For example, if a person takes health care policy and pays a premium of $50,000 for a year and no events requiring a claim occur, the premium is a total waste.
  • Most policies do not cover situations like natural calamities, floods, cyclones, earthquakes, etc.
  • In some policies, the premium amount paid exceeds the amount received upon maturity.

Frequently Ask Questions (FAQs)

What is premium in insurance, with an example?

The insurance premium is the amount paid by the policyholders to cover themselves against unforeseeable losses. For example, the policyholder can buy a policy for his car. However, if an accident occurs, the insurance company will pay compensation to the policyholder. This compensation covers damages to the vehicle and the driver.

What are the types of premiums?

Premiums are mostly paid for health insurance, life insurance, auto insurance, and long-term disability.

How often do you pay an insurance premium?

Premiums can be paid monthly, quarterly, or annually. Some companies allow buyers to pay it all at once, right at the beginning.

Are premiums and deductibles the same?

A premium is not the same as a deductible. A premium is an amount paid by the policyholders to cover themselves against unforeseeable losses. The deductible is the amount that the policyholder needs to pay to receive compensation from the insurance company. The premium amount will be refunded upon maturity. But the deductible is nonrefundable.

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This has been a guide to Insurance Premium and Meaning. We discuss how to calculate insurance premiums, its components and its differences from deductibles. You may refer to the following articles to learn more about finance –