Insurance provides peace of mind and confidence for family or business finances because it guarantees sufficient capacity to respond to major unexpected expenses. There are policies for unexpected events at home, with the car, for life or for health. To have them, an insurance premium is paid, and the premium is precisely what we are discussing in today’s article.
What Is an Insurance Premium?
Definition of Insurance Premium
The insurance premium is what the insured party pays. It is the price of the service provided by the insurer. It is set in advance according to several factors, such as the type of risk, the insured person’s age, payment method, compensation and the type of payment.
Components of the Insurance Premium
It has four elements:
- Pure premium: the insurer’s valuation of the insured risk. It is calculated according to statistics.
- Inventory premium: the insurer’s management expenses are added.
- Tariff premium: the previous price plus external expenses.
- Total premium: the final amount paid by the insured party, including taxes and other charges.
The following breakdown is also commonly used, although it varies depending on the insurance line:
- Net premium: the calculated amount the insurer must charge in order to cover the risks insured by the policy.
- Surcharges: percentages by which the premium increases depending on the payment method.
- Taxes: percentages by which the premium increases for taxes payable to the public treasury.
- Consortium: in damage policies, through payment of the corresponding premium, “extraordinary risks” are guaranteed by the Insurance Compensation Consortium.
- Total premium: the sum of the previous items, which is what the policyholder pays.
The Different Types of Premium
There is a wide variety of premium types based on different characteristics. Payment timing is one of them:
- Single: one payment covers the entire duration of the insurance.
- Periodic: payment is made in instalments, usually annually.
- Split: the fixed annual payment is divided into shorter periods, such as monthly payments.
- Fractional: the method used for insurance lasting less than one year.
Once payment methods are understood, there are different types of premiums depending on the insurance taken out. Life and funeral insurance have their own particularities.
Premiums in Life and Funeral Insurance
In life insurance and funeral insurance, premiums have two descriptors: one linked to how long they are paid, and another linked to the amount.
Based on time, there are two types:
- Whole-life: paid throughout life.
- Temporary: paid for a specific period.
Based on the amount:
- Single: one payment is made, generally only in funeral insurance.
- Increasing: increases over the years as the risk of death rises.
- Level: remains fixed, but more than the age-based premium is paid at the beginning.
- Decreasing: used in bank loans, it decreases as the outstanding debt falls, only in certain life insurance policies.
- Mixed: combines increasing and level premiums, rising up to a certain age and then remaining fixed.
When taking out a product with an insurer, it is essential to understand how the insurance premium works, its payment method and its variables. This helps avoid surprises or problems when using the contracted covers. At Vida SR insurance brokerage we are at your disposal.