Deposit Premium
An initial payment made to an insurance company at the start of a policy period, which serves as a down payment toward the total premium cost. The final premium is adjusted based on actual exposure or claims experience, with additional payments or refunds issued as needed.
Example
“The construction company paid a $25,000 deposit premium for workers' compensation insurance, with the final premium to be calculated based on actual payroll at year-end.”
Memory Tip
Think 'Deposit = Down payment' - it's like putting money down on insurance with final payment calculated later.
Why It Matters
Deposit premiums help businesses manage cash flow by spreading insurance costs throughout the policy period rather than paying the full amount upfront. This is especially important for businesses with fluctuating payrolls or operations where the final premium depends on actual business activity.
Common Misconception
Many business owners think the deposit premium is the total cost and are surprised by additional bills or audits at year-end. The deposit is just an estimate, and the final premium can be significantly higher if business operations exceed initial projections.
In Practice
ABC Manufacturing estimates $2 million in annual payroll and pays a $15,000 deposit premium for workers' comp. During the year, they hire more workers and actual payroll reaches $2.8 million. At audit, their final premium is calculated at $21,000, requiring an additional payment of $6,000 beyond their original deposit.
Etymology
Combines 'deposit' from Latin 'depositum' meaning 'something placed down' with 'premium' from Latin 'praemium' meaning 'reward' or 'payment for insurance.'
Common Misspellings
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See Also
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