Insurance Premium – Definition

Cite this article as:"Insurance Premium – Definition," in The Business Professor, updated December 2, 2019, last accessed October 28, 2020,


Insurance Premium Definition

Insurance premium refers to the amount which an individual or business entity has to pay in order to be covered by an insurance policy. Insurance premiums are paid for different insurance policies which typically cover things like healthcare, life, automotive, home, etc. After the individual or business entity pays the premium, it becomes income for the insurance firm. Insurance premiums can also be viewed as liabilities and debt instruments, as the insurer (the company) is required to provide coverage for the insured (the individual or business paying the premium) on any of the areas which the policy covers (health, life, etc.). However, if the insured fails to fulfill the premium as stated by the agreement between them and the firm, the policy would be perceived as invalid, and will most likely result in the cancellation of the insurance policy.

A Little More on What is an Insurance Premium

In the process of signing an insurance policy, you’ll be required to pay a premium to the insurer. The premium, in this case, refers to the amount that you’ll have to pay to cover up the total cost of your insurance policy. Investors have varying options of payment for their policies, as some insured parties are allowed to pay in installments (probably monthly or bi-monthly/semi-annually), while other insurers may demand full payment of the policy coverage upfront before entering into the agreement. It is also important to note that the insurer might require additional fees, as the insured party is subject to taxes and other service charges.

Insurance premium prices differs, and the difference in prices is dependent on various factors. Given below are some of the factors that can cause alternating prices on insurance premiums:

  •         The type of coverage
  •         The age of the party to be insured
  •         The location of the insured party
  •         Past record of the insured/claims filed in the past.

A typical example combining up to three of the factors we’ve stated above is the likelihood of a teenage driver in an urban area getting into an accident, or getting filed against. In this case, there is a higher chances of a claim being created against such a teenage driver, than against a teenage driver in a suburban area. Simply put, the more the risk, the costlier the insurance premium. For a life insurance policy, the amount to be paid is dependent mostly on the age of the individual at the time of the agreement or inquiry. Also, most insurance firms will consider the insured’s health condition to determine how much he or she is required to pay for the policy coverage. For life insurance, the younger an individual, the lesser the premium fee. However, for an older individual with the same health status as the younger individual, the premium fee would be higher when compared to that of the former.

In some cases, the cost of renewing an insurance premium after the first has expired becomes higher than the amount that was previously paid. This price is often modified to reflect the risk encountered during the former period of the policy coverage. Sometimes, the price is modified to reflect an increase in the cost of coverage in general.

Important Notes

  • Insurance premium refers to the amount of money that an individual or business entity (referred to as the insured) is required to pay for acquiring an insurance policy coverage.
  • Insurance premiums are usually paid for policies that cover healthcare, automotive, life, and various other areas.
  •  In some cases, insurance premiums increase after the first policy period ends.

Ways That You Can Get a Cheap Insurance Premium

Getting the cheapest and best insurance premium shouldn’t be much of a hassle. Most customers have the option of shopping around in individual insurance companies, as well as shop online. For the online marketplace, finding the best insurance premium is even much better as you can have the option of getting quotes by just inputting basic information on the web.

An example of a fully polished platform for insurance premiums is the Affordable Care Act (ACA), which allows customers to easily connect or look for the best insurance companies to fit their coverage needs. Customers can easily find the best rates by simply logging in their details and basic information on the platform. These pieces of information may include the birth date of the individual, the address of the client, his or her income worth, as well as some personal details of the client like their SSN or other identification means. In some cases, potential customers will be required to input or submit the personal details of other persons in their household.

There are many options available for clients based on their location or state of residence, and each option comes with a different premium, favorable treatments, and deductions in some cases. Diversity in policy coverage is dependent on how much the premium costs.

If a client doesn’t wish to search online due to personal reasons, he or she can choose to stick to a broker or insurance agents. Brokers and agents are people who help connect clients with insurance firms that are suitable to their coverage needs. Most brokers can connect clients to auto, life, health, and home insurances. However, it is recommended that clients make their research before taking the advice of brokers and agents, as most of their recommendations are affected by the commissions which they receive from insurance firms.

Usage of Insurance Premiums

Insurers usually use premiums to meet up with the liability benchmark set up by state regulators. They may also invest the premium to generate higher returns so that they can better pay of insurance claims while keeping the profits for themselves. This makes it easier for them to offer lower rates that attracts clients, as they know that they can grow the client’s money and keep excess returns. However, this is not always the case as state regulators require a certain percentage of the premiums received by insurance firms to be liquid assets to enable them pay up quickly in case of claims.

Insurance Prices Future Speculations

Actuaries are professionals that study the risk associated with a client’s filing for insurance, and they are usually hired by insurance firms to determine the premium prices for a particular insurance policy. The presence of artificial intelligence and other calculative highly designed algorithms is causing an evolution in the buying and selling of insurance plans. There are different speculations about the activities of actuaries in the future, as some persons believe that artificial intelligence will replace human actuaries in the near future, while others believe that the presence of these algorithms will further improve the need for actuaries, as they’ll be the only ones to better operate these systems, thus taking their jobs to a higher level.

References for “Insurance Premium › Personal Finance › Insurance › Glossary

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