Premium (Insurance)
The amount of money you pay to an insurance company to maintain your insurance coverage, typically paid monthly, quarterly, or annually. This payment keeps your policy active and ensures you remain covered for the risks outlined in your policy.
Example
“Sarah's auto insurance premium is $150 per month, which she pays to keep her car covered in case of an accident.”
Memory Tip
Think 'Premium' = 'Pre-pay Me' - you pay in advance (pre) to get protection.
Why It Matters
Premiums directly impact your monthly budget and determine whether you can afford necessary insurance coverage. Understanding how premiums are calculated helps you make informed decisions about coverage levels and shop for better rates.
Common Misconception
Many people think premiums are the total cost of insurance, but premiums are just the regular payments - you may still owe deductibles and copays when filing claims. Additionally, paying premiums doesn't guarantee claim approval, as coverage depends on policy terms and circumstances.
In Practice
John pays a $200 monthly health insurance premium ($2,400 annually) for his family plan. When his child breaks an arm, John still pays a $500 deductible plus 20% of remaining costs, but the insurance covers the bulk of the $8,000 hospital bill. Without the premium payments keeping his policy active, John would have faced the entire $8,000 expense.
Etymology
From Latin 'praemium' meaning reward or prize, originally referring to something of value given in advance. The insurance context emerged in the 17th century when merchants paid fees upfront for protection against shipping losses.
Common Misspellings
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Related Terms
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See Also
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