Insurance premiums: Overview, definition, and example
What are insurance premiums?
Insurance premiums are the payments made to an insurance company in exchange for coverage under an insurance policy. These payments can be made monthly, quarterly, annually, or as otherwise agreed in the policy. The amount of the premium is based on factors such as the type of coverage, risk level, policyholder’s history, and the insurance provider’s pricing model.
For example, a business that purchases liability insurance may agree to pay an annual premium of $5,000 to maintain coverage for potential legal claims.
Why are insurance premiums important?
Insurance premiums are essential because they fund the protection provided by an insurance policy. Without regular premium payments, the policy may lapse, leaving the policyholder unprotected in case of loss or liability.
For businesses, insurance premiums are a necessary expense that helps mitigate financial risks associated with property damage, lawsuits, employee injuries, and other liabilities. Clear terms regarding premium amounts, payment schedules, and consequences of non-payment help avoid coverage interruptions and disputes.
Understanding insurance premiums through an example
Imagine a retail business purchases property insurance to cover its storefront against fire and theft. The insurer assesses the risk and sets an annual premium of $3,000. The business agrees to pay this amount in monthly installments of $250. If the business misses a payment, the policy may be suspended or canceled, leaving the business unprotected.
In another case, a construction company takes out workers’ compensation insurance, with a premium based on the number of employees and their job risks. The insurer calculates the premium at $20,000 per year, and the company must pay this amount to ensure continued coverage for workplace injuries.
An example of an insurance premiums clause
Here’s how an insurance premiums clause might appear in a contract:
“The Insured agrees to pay insurance premiums in the amount of [$Amount] on a [monthly/quarterly/annual] basis. Failure to make timely payments may result in suspension or termination of coverage as outlined in this Agreement.”
Conclusion
Insurance premiums are the cost of maintaining coverage under an insurance policy, ensuring financial protection against various risks. Regular payment of premiums is essential to keep policies active and avoid gaps in coverage.
By clearly defining insurance premium obligations in contracts, businesses can ensure continuous protection, avoid policy lapses, and manage financial risks effectively.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.