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Friday, 30 August 2019

Definition of Premium in Insurance

Definition of Premium in Insurance



Premium is an amount paid periodically to the insurer by the insured for covering his risk. Description: In an insurance contract, the risk is transferred from the insured to the insurer. For taking this risk, the insurer charges an amount called the premium. The premium paying frequency can be different. An amount of money has to be paid regularly to the insurance company by an insurance holder for insured life risk. Insurance premium means the annual payment made by a person to an insurance company.
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Generally premium means the extra payment to buy a share. This word mostly uses in the share market where a shareholder can sell or buy a share. If the shareholder buys a share with the extra money and face value of it, then that’s the extra money is called the premium

But in the insurance point of view of premium refers to the different meaning. Premium means that type of money that an insurance company takes from the insurance holder by promising that he must fulfill the losses if occurred in the insured product. If this premium is paid more than one than its called installment. For the contract of the life insurance, insurance holder has to pay his installment to the insurer in different period of time. In this type of proposed insurance, the insurance holder must pay money to insured his life by the installment. This installment is called the premium of life insurance. Actually premium is just the purchasing price of the insurance. 


P.H.Collin has defined premium as "Insurance premium means the annual payment made by a person on a company to an insurance company." 


Oxford Advanced Learners Dictionary quoted premium as "Premium means an amount of money to be paid regularly for an insurance policy."

Premium is that money for which insurer provides financial security against risk on behalf of the insurance policyholder. Premium can be paid in one time or several times.




In the case of insurance, premium means the price you or business pay for an insurance policy. Premiums are based on the assets (things) being protected, the cost of replacement and the statistical likelihood that a loss can occur.

For instance, the premium to insure a building is going to be based on the square footage of the building, the construction material used, the location, if it has a fire alarm or sprinkler system and it’s regional locality and weather (ie: is it in a hurricane zone, tornado ally).

For the insurance company providing the policy, the premium has three parts. The first part is for expenses, such as the salaries to pay underwriters, run computer systems, and pay for office space. The second part is for claims. Should one have a loss the expectation is the insurance company will make a claim payment. The last part is the profit. Insurance companies and their owners must put up capital (real money) and should expect a return on that invested capital.

For me, premium, in the insurance sense, is the price of protection and peace of mind of something valuable and/or expensive to replace.


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