What is an Insurance Premium? To answer this particular question, you must first understand what insurance is. An insurance policy is a legally binding contract, where one party (the insurer) agrees to compensate the other party (the insured) for a loss as a consequence of a specific risk. As part of this insurance policy the insured is usually required to pay a specified amount of money to the insurer, in exchange for the promise that should a loss occur, the insured will be remunerated for possible future losses. The specified money paid by the insurer is called the insurance premium.

The insurance premium is the monetary cost charged by insurance companies to acquire insurance coverage. This cost can usually be paid in a lump sum on in increments during the life of the policy. Usually, not paying the premium in a timely manner, will result in the insurer canceling the policy. Occasionally coverage can be reinstated if the outstanding balance is provided within a certain time frame.

When asking “What is an insurance premium?”, it is necessary to understand that different types of policies exist and the premiums vary based on the level of risk relevant to each particular circumstance. Depending on the value of the insured property, the premiums quoted by the insurer could be higher or lower, for example the cost of replacing someone’s home would be considerably more than replacing someone’s car or boat. The variation would be evident in the amount required for the premium. The premium could also vary dependent on the features of the insured. A reliable, safe driver would incur a lower premium than one who had considerable traffic violations on their record.

Many insurance premiums are based on personal information and then calculated according to statistics and personal habits. This applies also to health insurance and life insurance premiums. A non-smoker is expected to live a healthier life style than a person that smokes, generally their premiums would reflect that statistical expectation. Insurers also have the ability to deny coverage to applicants who pose a risk that cannot be justified, for example providing life insurance to someone diagnosed with a terminal illness.

Insurance premiums can also fluctuate between billing cycles depending on accident claims, particularly if the claimant or the policyholder is found to be at fault.  Because certain insurance can be required by law, for example, for drivers, it may be necessary for the policyholder to pay the higher premium rate or purchase insurance through another provider willing to cover someone who has fallen in to a higher risk category. However paying the insurance premium and obtaining insurance coverage may be, at times, legally necessary.