Premium, in the simplest of terms, is the total cost of any option. It is basically the sum of your option’s time and intrinsic value. When it comes to insurance, it is the amount that is required by an insurer in order to give coverage under an insurance plan for a given time period.
One common example of insurance premium is auto insurance. An individual pays a premium every month in order to get protection against theft and any damage.
Understanding Premium
Insurance premium refers to the amount that a company charges for active coverage. The premium that the person pays is determined by factors like health, age, socio-economic background, and the kind of area that a person lives in. People pay the premium in small payments over the year and the amount of premium may change with time.
If an individual fails to pay the premium, the policy is void and the companies cannot make any claims against it.
Things That Premium Covers
Premium coverage is generally stated in detail in the insurance policy and the services provided depend on the type of policy that a person has opted for. Here are some types of services that are covered by premium:
Life Insurance
Life insurance pays a sum when the policy holder dies, to the dependents mentioned in the will. It may even cover the expenses that are related to death that include any debt and even the funeral arrangements.
Health Insurance
Health insurance covers mental health services, expense of doctor visits, surgical procedures, and the cost of medicines. This is just a general overview because each plan differs according to a person’s needs.
Car Insurance
The premium covers the damage that might be caused to a vehicle. Vehicle services generally cover the same types of services.
Home Owners Insurance
This is paid in order to cover the damage to the home in case of a natural disaster, fire, or theft. Renter’s coverage is similar to this, and pays the damage that is caused by the policy holder.
Change in Rates
There is a change in premium rates at times due to a higher number of claims on the policy. In the case of property insurance, the rates go up if the property is relocated to a threatening area.
Further Reading
- Capturing the value premium in the United Kingdom – www.tandfonline.com [PDF]
- The external finance premium and the macroeconomy: US post-WWII evidence – www.sciencedirect.com [PDF]
- The eco-efficiency premium puzzle – www.tandfonline.com [PDF]
- The equity premium consensus forecast revisited – papers.ssrn.com [PDF]
- Returns to talent and the finance wage premium – academic.oup.com [PDF]
- The external finance premium in the euro area: A dynamic stochastic general equilibrium analysis – www.sciencedirect.com [PDF]
- Real estate, the external finance premium and business investment: A quantitative dynamic general equilibrium analysis – onlinelibrary.wiley.com [PDF]
- An empirical study of liquidity premium in shanghai stock market [j] – en.cnki.com.cn [PDF]
- Anomalies: The equity premium puzzle – www.aeaweb.org [PDF]
- The equity premium in retrospect – www.sciencedirect.com [PDF]