What is the insurance premium?
The insurance premium is the economic amount that the policyholder must pay to the company with which he has contracted his policy in order to be able to benefit from the coverage established in it.
What is the insurance premium?
When contracting any type of variable life insurance, the policyholder must pay the payments agreed with the company. Thus, it guarantees to be able to benefit from the services and coverage agreed by both parties in the contract.
Therefore, the payment of the premium is the consideration for the services that the insurance company offers to the insured during the determined period of time.
Its value will depend on the type of risk insured and is always set in advance by the insurance company. It must be sufficient for the insurer to be able to face the insured risk, calculating that not all the insured will need the coverage.
How is the insurance premium calculated?
The cost of the insurance premium varies depending on the different existing policies and the coverage they include. And it is that the cost is based on the risks that the company assumes for each insured. Being able to take into account age, the probability of suffering an accident, statistical data…
The main part of the cost is called the pure premium, which means the real cost of the risk assumed by the insurer, without taking into account its management costs. As other expenses are added, the premium is called in other ways: inventory premium (adding administration expenses), tariff premium (adding external management expenses) and finally the total premium, which includes taxes and other concepts such as the amounts destined to the insurance compensation consortium.
The remaining amount of this calculation is called the risk premium, to which the rest of the premiums or surcharges mentioned above must be added to find out how much the policyholder must pay.
- Security surcharge. It will be used to cover unfavorable random deviations from the expected accident rate
- Surcharges for management expenses. It will be used to cover administration and acquisition expenses, including business maintenance costs.
- Surcharge for profit or surplus. It will be used to remunerate financial resources and increase the entity’s own funds.
- Complementary taxes and surcharges: taxes on insurance premiums and surcharges established in favor of the Insurance Compensation Consortium and the Insurance Entity Settlement Commission and other taxes that fall directly on the premium.
An example is the case of life insurance, where two variables are taken into account. On the one hand, biometric tables that reflect the probabilities of death and survival of a group of people based on age. In them, you can see the number of people who exceed a certain age.
To these are added the probabilities, taking into account the previous tables, the probabilities of death or survival that are necessary for calculating the premium are calculated. And combining them of course the amount we want to insure. With all this and through a complex formula, the premium will remain. All of this makes it logical that the younger they are, the cheaper life insurance is, since the chances of survival are much higher.
What are the types of premium?
The premium types are based on different types;
According to the calculation period and the payment method:
- Fractional premium: calculated for a period of less than one year.
- Fractional premium: calculated in annual periods but that the policyholder must pay in smaller periodic payments.
- Annual premium: calculated for twelve months and paid by the policyholder in a single payment.
- Single premium: the policyholder makes a single payment for the total calculated amount that must be paid, but the term of the coverage is greater than one year.
According to the economic cost during the validity of the contracted policy:
- Fixed premium: remains unchanged throughout the life of the policy.
- Variable premium: when the foreseen circumstances may suppose a different amount foreseen. In this case, it will be recorded in the contract.
Depending on the risk:
- Natural premium: very common in life insurance, since since these are contracted annually, they grow over the years, due to the increased probability of death of the insured.
- Level premium: is the one that remains fixed and invariable throughout the validity of the risk to be assumed throughout the life of the insurance contracted.
- Growing premium: for policies that have a successive increase in the amount to be paid as time goes by.
- Decreasing premium: for those policies that decrease the amount to be paid over time.
According to the annuity in which it is satisfied:
- Initial premium: the amount to be paid at the time the contract is signed for the coverage to take effect.
- Successive premium: these are the types of premium that are paid, by the policyholder, throughout the entire term of the insurance. It differs from the initial premium in that it is likely that these will be of a higher amount.
- Advance premium: this type of premium is for policies taken out for several years. They tend to be more frequent in life insurance and carry a discount bonus.
How is the insurance premium paid?
The most traditional payment formula is that of the periodic premium . It is paid in regular installments for the duration of the insurance. If the life insurance cap is until a certain age is reached, until its validity will be charged annually.
But also on many occasions it is allowed to split into shorter periods, it is the so-called split premium , which allows the insured to pay monthly or quarterly, for example, his insurance premium.
On the opposite side are single premium insurance . Through them, through a single payment, the entire premium is paid for the entire duration of the insurance.
When are payments made?
The first payment is made at the time of contracting the insurance. The following payments will be made at the expiration of the policy, allowing, in the event that it is not paid, having a grace month to make the payment of the premium. As soon as the payment of the premium is made, the insurance coverage will take effect within 24 hours.
The regulations establish a maximum term of six months from the expiration date for the insurer to demand from the policyholder the payment of the premium for the current period, after which without mediating a judicial request, the contract will be automatically terminated.