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 insurance premiums are 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 and 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 the 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 policy holder 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:

• Monthly - The insurance premium must be paid each and every month for the duration of the contract, this will be 12 times in a calender year and usually on the same day because it will be taken by direct debit.
• 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.
• 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.
• 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 other 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 cost?

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. 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 policy holder 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 being that there will be a claim made on the policy at some point and the insurance company will have to pay out. 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:

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 love people like Mr Rush because he represents 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.

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, than 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:

• Your ageYour gender
• Whether you smoke or not
• Information on your health
• Information on your occupation
• Information on your lifestyle

For auto insurance premium :

• Your age
• Your gender
• The type of car you drive
• Where you live
• Whether you have had an previous claims

As we have already stated, the idea of 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 categorise 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.

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.