What is Premium?
A premium is the amount of money an individual or business pays to an insurance company to keep an insurance policy active. In life insurance, this payment is typically made on a monthly, quarterly, or annual basis, depending on the terms of the policy. Premiums are essential for maintaining coverage, as failure to pay them can result in a lapse of the policy, leaving the policyholder without protection.
For different types of life insurance policies, such as term life, whole life, and indexed universal life insurance, premium amounts can vary significantly based on factors like the age of the insured, health status, coverage amount, and length of the policy. With term life insurance, premiums are generally lower and fixed for the term of the policy, but once the term expires, renewal premiums can increase. Whole life insurance, on the other hand, often has higher, fixed premiums that also contribute to a cash value component, providing additional benefits beyond the death benefit.
Indexed universal life insurance policies feature flexible premium options, allowing policyholders to adjust their payments within certain limits. This flexibility can provide added convenience, especially for those who experience variable income levels.
Premiums are calculated by the insurance company based on actuarial assessments, which evaluate the risk factors associated with the insured person. These assessments allow the insurance company to determine the likelihood of a payout and, accordingly, set a premium amount that covers potential claims and provides profitability.
