Definition Of Premium In Insurance

Definition of "Premium"

Cory Ehlert, Real Estate Agent Keller Williams

Rate that an insured is charged, reflecting his or her expectation of loss or risk. The insurance company will assume the risk's of the insured (length of life, state of health, property damage or destruction, or liability exposure) in exchange for a premium payment. Premiums are calculated by combining expectation of loss and expense and profit loadings. Usually, the periodic cost of insurance is computed by multiplying the premium rate per unit of insurance by the number of units purchased. The rate class in which the insured is placed includes large numbers of individuals with like characteristics who pose the same risk. Every individual in a given class will not incur the same loss; rather each has approximately the same expectation of loss (known as the Principle of Equity).