What Is the Meaning of Premium in an Insurance Policy?

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Auto insurance is one type of product you pay premiums for to gain guaranteed benefits.
Auto insurance is one type of product you pay premiums for to gain guaranteed benefits. (Image: car image by Warren Millar from Fotolia.com)

The premium in an insurance policy is the cost that the policy holder pays to obtain the guaranteed benefits offered by the insurer. Premiums are determined by various factors related to the product and the individual, group or business being insured.

Function

Premiums are one of two common forms of revenue that drive insurance companies. The other is income from investments made with the revenue collected from premiums. Premiums are typically paid in monthly, quarterly, semi-annual, or annual installments. Some providers offer discounts for policy holders who pay in bulk installments upfront since this gives the insurer more money to invest.

Types

Premiums are paid on many types of consumer and business insurance products including common ones and customized solutions. Common individual insurances include: medical, dental, life, disability and auto insurance. Businesses typically buy insurance to cover liability for injury or damage to others, as well as protection for damage or loss of the building and contents of the business.

Considerations

Factors that affect premium rates are particular to the product category. However, premiums in any insurance category relate to the level of benefits and the perceived risk taken on by the provider when it offers a guaranteed payment on covered events. Risks can include product-related factors and factors related to characteristics of the insured. For instance, a home with a high replacement cost, in a volatile weather zone, with modest safety features and high crime, would be much more risky to the provider than a home less exposed to risk of damage or loss. In auto insurance, driver statistics and tendencies are considered along with product features.

Benefits

The functional benefit of insurance is the guarantee of payment on covered events by the insurance provider. The amount of benefits are stated in policy terms and may include a total maximum benefit as well as benefit maximums by claim type. "Peace of mind" is an emotional benefit of buying insurance protection. Insurance is a rare product that we pay (premiums) for and generally prefer not to have to (functionally) use.

Buying Process

Compare insurance premiums for several providers within the product category in which you are looking for coverage. Insurers compete on price as well as reputation and claims service. Obtain multiple quotes for similar products by going to websites of online-only or conventional insurance companies. Decide what policy terms are most important to you and consider opportunities for premium savings through bulk installments.

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