Pro Rata Rate
Definition of "Pro Rata Rate"
The term pro rata comes from Latin and translates to in proportion, proportionally, the proportion of, proportionately determined, or according to a specific rate. It is often used in legal and economic texts or contexts to express a just distribution of an allocation. Pro rata generally refers to shares of a whole that is split in various ways, like a year is divided into 12 months or 365 days, a cost is divided in two ways that correspond in value to the profit, an asset is split into two, corresponding with the investment of each party.
The reason for which we discuss pro rata in the insurance world is because there are many pro rata elements in the field. The term weighs heavily on proportionate distributions of gains, liabilities, premiums, and payments, and the insurance industry deals with all of these. Pro rata clauses deal with spitting the coverage. In contrast, pro rata cancellations cover policies terminated during their coverage.
Pro rata rates are ways through which an insurance company can determine monthly payments or additional payments to an existing policy. We’ll see how just below.
Where is Pro Rata Rate Used?
Usually, insurance policies have a timeline of 12 months, a full year. There are, however, several types of insurances that have policies running for a few days, a few weeks, or a few months. Not all types of insurances are limited to the 1-year timeline. Look at travel insurance, car insurance, or health insurance as their coverage can be for less than a year.
In those instances, the insurance company has to establish an amount for the insurance premium. So, if an annual premium costs $1,000, but the driver loans the car and only uses it for two and a half months, he can sign a policy for that period alone. The insurance company needs to calculate the pro rata of the premium for that period. The pro rata rate, in this case, would be:
Pro Rata Rate = daily premium X days
Pro Rata Rate = ($1,000(annual premium)/365) x 76 (two and a half months)
Pro Rata Rate = $208 approximately
Another situation in which these pro rata rates help insurance companies to carefully calculate the exact premium required for a policy is when the policy changes. So, if John has a $1,000 annual premium for his car, but sometimes during that period, he decides to add another car to the policy from August 24th. In this situation, the start date, end date, and the date when the policy changes are required for a correct calculation. The pro rata rate, in this case, would be:
Pro Rata Rate = daily premium X days
Pro Rata Rate = ($1,000/365) X 130
Pro Rata Rate = $356 approximately
The figures are usually rounded up.
Popular Insurance Terms
Health insurance coverage only for a specified catastrophic disease such as cancer. It is important to ascertain the waiting period required, maximum benefits and maximum length of time ...
Authorization to borrow from the U.S. Treasury by the issuance of notes to the Treasury. The Secretary of the Treasury must approve the notes and their interest rates. The PBGC must be self ...
Use of new rate structures by an insurance company without first obtaining approval of a State Insurance Department. ...
Policy under which the insurer will pay the actual cash value of the property at the time the property was damaged or destroyed provided the loss falls within the limitations of the policy. ...
One that provides group health or pension benefits for a multiemployer plan. To lower the cost, small firms band together to take advantage of the economies of large group underwriting. ...
Sum total of all assets owned by the decedent to include personal property, real property, and trust property. ...
Means of land title registration used in some states that in effect, provides a government sponsored form of title insurance. Under this system, a government official, such as county ...
In general, a civil wrong, other than breach of contract, for which a court will provide a remedy in the form of a suit for damages. Torts include negligent acts or omissions on the part of ...
Calculation of insurance premiums based on an age less than the current age of the insured. ...
Have a question or comment?
We're here to help.