Insurance Premium Definition And How Insurance Premium Is Calculated

Insurance Premium Definition

Thank you for visiting our page all about what an insurance premium is? Where we will provide you with a straightforward insurance premium definition and some information on how the insurance premium is calculated? There is always a first time for everybody when it comes to taking out an insurance policy. And, when you are faced with that situation there, can be a whole load of industry jargon thrown at you that makes absolutely no sense at all. The insurance premium is one of the key phrases that you need to know about when it comes to entering into an insurance contract. nd we have for you here a free insurance premium definition.

What is an insurance premium?

In very short and basic terms, an insurance premium is a periodic; payment made on an insurance policy by the policy owner to the insurance company, who are providing the contract. The insurance premium is something that is predetermined before the contract is taken out and will be offered to the policyholder in order for them to accept or decline.

Once they accept the policy will go into force and the premium will be due periodically for the duration of the contract. The insurance company will have assessed the application and determined how much the cost of insurance is and the offer is basically them saying that they have seen what you want and taken into consideration the risk that you present to them and this is how much it will cost you to do business with them, take it or leave it.

So we have mentioned in our insurance premium definition that the premium is due periodically, but what do we mean?

Insurance contracts will usually state that the insurance premium is due on one of the following basis:

  1. Monthly – The insurance premium must be paid each and every month for the duration of the contract. This will be 12 times in a calendar year and usually on the same day because it will be taken by direct debit.
  2. Quarterly – The insurance premium must be paid on a quarter yearly basis. This means that it will be due every three months of the year, four times in total. For example on the first of the month in March, June, September, and December.
  3. Annually – The insurance premium must be paid on an annual basis. This means that it will be required once every year at a stipulated time, usually around the policy anniversary. This may be required by direct debit or other forms of one-off payments such as a cheque.
  4. One-off premium – Some insurance policies can be funded by a one-off premium at the start of the contract, This is usually a large lump sum and is generally paid by cheque or another one-off payment methods.

The insurance premium definition will be included in the insurance contract in writing, And this will state that a certain premium will be due every period for however long the policy is set to run for, for example. It may be $50 a month for 20 years or $20 a month over a 12-month contract.

How much will an insurance premium Payment?

How much will an insurance premium Payment?
How much will an insurance premium Payment?

The cost of an insurance premium will depend on a number of factors and will vary greatly depending on which type of insurance it is that you are applying for. Usually, for almost every type of insurance you will be able to approach the insurance company or go onto the internet in order to obtain a quotation for the insurance contract that you want.

You will have to provide some basic information(see below) about yourself and the insurance cover that you require and you will then be provided with a basic premium. This insurance premium is produced out of a number of risk factors and statistics drawn from the information that you have provided and the contract it is that you want.

Number of Factors

This is not particularly personal to you. Because there are still a number of factors that could change that premium that would come about when you are questioned thoroughly during the application process. It is more of a general idea of how much the insurance would cost for you with all being well.

When you actually apply for the insurance you will need to provide a lot of personal information that will allow the insurance company to assess you individually as a risk to them, as that is what every policyholder is to an insurance company a ‘risk’. Depending on how you come out of this assessment will determine the insurance premium that the insurance company decide that you should pay, the bigger the risk, the higher the premium charged.

To try and make this even more simple we have used an example below to show you what we mean by risk when we are talking about our insurance premium definition. Every person that an insurance company does business with presents some kind of risk.

The risk is that there will be a claim made on the policy at some point and the insurance company will have to payout. All insurance premiums paid by customers go into a big pool of money and this pool is where claims are paid from.

The pool has to be sufficiently managed so that it does not run dry for when claims arise. As they frequently do, The most efficient way for this to be done is for the insurance company to charge everybody accordingly for the risk that they present. As this is only fair to everybody that is contributing to the pool.

Here are a couple of examples:

Here are a couple of examples
Here are a couple of examples

Mr. Rush is taking out life insurance, he is in his early twenties, fit, healthy, has a regular job. Where he does not do anything dangerous, he does not smoke and there is no history in his family of any disease. He wants $100,000 of life insurance cover.

The insurance company loves people like Mr. Rush because he represents a minimal risk. They will charge him a minimal premium. Because the chances are as long as the policy is in force. He will never need to make a claim. So his premiums will go into the pool and make it stronger. Yet there will never be the need for any money to come out of the pool for him. There are lots of customers like Mr. Rush.

Mr. Fowler is also taking out a life insurance policy. He is in his late forties and has had a series of health problems over the last ten years. He is a heavy smoker and works in a job that could pose a risk to his well being on a regular basis; %He also wants $100,000 of life insurance cover.

Mr. Fowler as he represents a much higher risk

The insurance company has to be very wary of Mr. Fowler as he represents a much higher risk than the average person. He would have to pay more anyway for two reasons, firstly he is older than Mr. Fowler and secondly, he is a smoker.

Insurance companies want to do business with everyone so they will decide what they can do for Mr. Fowler, they may restrict his cover, or make some exclusion over his job. But either way, he will have to pay significantly more than Mr. Rush for his insurance premium because of the higher risk he poses to the pool of money.

As you can see it would not be fair for Mr. Fowler to pay the same amount of money for his insurance as Mr. Rush, he is plain and simply a much higher risk and therefore must pay for it!

Basic information required to obtain a quotation

Earlier on in our insurance premium definition. We spoke about how you would be asked for certain basic pieces of information in order to obtain a quotation for an insurance premium. These pieces of information vary depending on the type of insurance it is that you want.

For instance, it goes without saying that you will be asked different things if you want life insurance or health insurance, Then if you wanted to get insurance for your new car. Some of the fundamental things that an insurer will ask you in order to provide you with a basic premium are:

For life or health insurance premium:

  1. Your ageYour gender
  2. Whether you smoke or not
  3. Information on your health
  4. $Information on your occupation
  5. Information on your lifestyle

For auto insurance premium :

  1. Your age
  2. Your gender
  3. The type of car you drive
  4. Where you live
  5. Whether you have had previous claims

As we have already stated, the idea of the collection this information is to assess how much of a basic risk you present to the insurer. The basic premium is what you are likely to pay if the insurer can categorize you in a certain risk group. If when they assess your application in full they see you as a high risk. Then you will either be charged more for your insurance premium or you may be declined the cover. Here you know about Insurance in Spanish.

Return Of Premium Term Life Insurance

Return Of Premium Term Life Insurance
Return Of Premium Term Life Insurance
  • At the end of the term period, Return of Premium Term Life Insurance policies return the premiums paid for the policy to the owner of the policy.
  • Return Of Premium Term life insurance policies are state-specific. And not all insurance companies offer term life insurance policies to residents of all states.
  • Term life insurance policies provide a death benefit to beneficiaries during the term of the policy only. And term life insurance policies have no cash value.
  • All Term life insurance policies have a named owner, a named insured and named beneficiary designations.  
  • Someone or a company or an organization can be the owner of term policies on someone else’s life only; when he/she or a company/organization has an “insurable interest”.
  • Cost of a term life insurance policy is mainly a function of gender, current health, age, tobacco use status, amount and period of coverage.
  • Different life insurance companies offer similar type policies; however, the cost of the policies can vary widely from company to company.
  • Term policies are typically issued for 1 year up to as many as 30 years in some states.
  • Most term life policies are issued only after a medical questionnaire and in some cases only after medical tests.

Premium Term

  • Many life insurance companies offer guaranteed renewable term life insurance policies.  
  • The death benefit payable to a beneficiary upon the death of the insured is dependent on the claims-paying ability of the issuing life insurance company.
  • The death benefit payable to a beneficiary is income tax-free. And in some case estate tax-free, which is dependent on a number of factors.
  • Term life insurance policies typically offer the highest death benefit; at the least cost versus virtually all other types of life insurance policies.
  • Some financial professionals feel from a financial value perspective the one should consider “BUYING Term and INVESTING; the Difference” versus the purchase of other types of life insurance policies.
  • To obtain an online Return Of Premium term insurance quotation. Please submit an “Instant Term Quote” request on the upper right-hand side of this page.
  • Some companies in some states offer ONLINE issued policies with a Return Of Premium option, for a quote click here.
  • If you wish to be contacted by a licensed professional agent regarding Return Of Premium term Insurance. Please complete and transmit the form found on the right.

More than an insurance premium definition

There is much more to our site than just our insurance premium definition and information on what an insurance premium is. Please take a look around at all of the free information. That we have on the many different types of insurance policies. As this may help you to make an informed decision when it comes to taking out your next insurance policy.

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