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When you purchase an insurance policy, the risk is assumed by the insurer. The insurance company charges a premium to assume the risk. This premium is paid periodically either monthly, quarterly, semi-annually, or annually. Some insurance policies allow you the option of a single premium during the entire duration of the plan.
An actuary assumes the responsibility to determine the premium on different types of policies based on numerous factors. Some of these factors include your age, health conditions, existing medical illness, type of employment, and others.
A common question that many people have is what is an insurance premium? In simple terms, it is an amount that you pay to the insurance company to ensure you receive the coverage under the plan.
The procedure to determine the insurance premium depends on the type of cover chosen and the probability of a claim being filed under the policy. Your location, lifestyle, and habits also play an important role in the determination of the insurance premium.
Most insurance companies take the help of qualified and experienced actuaries to determine the probability of a claim being made under the policy to determine the amount of premium. If the possibility of filing the claim is more likely, you will have to pay a higher premium and vice versa.
An insurance premium is also paid for non-life plans, such as motor insurance. In case of such plans, the insurer may reduce the annual premium amount if you do not file a claim during the policy term. This is known as the No Claim Bonus (NCB), and accumulates for every year when you do not file a claim.
The amount of the premium is dependent on several factors. These include, but are not limited to, the following.
The insurer provides several options when you want to purchase an insurance policy. You will have to pay a higher premium if you opt for a greater and comprehensive coverage. For example, if you opt for a term insurance plan with higher coverage, the premium amount is greater.
A commonly used and known term when you look for an insurance policy is the sum assured. The premium amount and the sum assured are directly proportional, which means that greater coverage entails a higher premium. However, some ways may enable you to procure more coverage at an affordable premium. One way to reduce the premium amount is to increase the excess. This is the amount that you must pay in case of a covered event occurring before the insurance company accepts your claim.
Although this factor does not directly relate to you, it benefits you in terms of a competitive premium for your insurance plan. Because insurance companies want to increase their customer base, they attract new clients through reduced premiums. Another aspect of competition is that when one insurer reduces the premium, most other insurance companies follow suit, which makes it beneficial to you.
In addition to knowing what an insurance premium is, it is recommended you understand the types of premiums. There are two types of premiums as listed below.
This is a basic type of insurance premium where you pay a fixed amount during the entire policy duration. It is not complicated and is self-explanatory.
This is slightly more complex. When you choose a flexible premium option, you have the choice to make certain changes to the insurance policy. You may choose to enhance the insurance coverage or increase the number of people covered under the same plan in the future. Based on the modifications you make, the premium will change.
When you want to understand what is a life insurance premium, you will only gain some basic understanding. This is because, in most instances, nobody except insurance companies completely comprehends the way premiums operate. The actuaries are responsible for calculating the insurance premium based on several factors. You may contact such actuaries to further understand insurance premiums thoroughly.
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