If you associate the word “prize” with winning Euromillions or any other social game, know that there are different meanings. In the case of insurance, for example, it comes out of your pocket. Find out what the insurance premium is, how it is calculated and what happens if you don’t pay it.
The insurance premium is one of the most important components of an insurance contract. This is the consideration paid by the customer to ensure that the insurer accepts a certain risk. It sounds more complicated than it is, so in this article we explain what you need to know to get comfortable with the term.
Insurance premium: what is it?
The premium is the price of insurance and includes costs such as:
- Coverage of the risk you want to insure. For example, rebuilding a house after a house burns down, repairing a car after a collision or claiming disability compensation.
- Acquisition charges. Normally, it is the commission paid to the mediator who solicits the contract and monitors the hiring process.
- Possible management and collection costs. Used to pay for the day-to-day running of the insurer and includes salary or rent expenses.
- Charges for issuing the policy. They are charged only once.
To this amount are added the due taxes and fees. They are paid by the customer, but are not considered as part of the prize.
How do insurers calculate the premium?
The main component of the price is the hedging of the risk, as indicated above.
The insurer calculates the probability of occurrence of that same risk and the average cost of the indemnity that it will have to pay. Then, depending on the number of contracts it holds, it calculates how many claims it will have to pay in a year. The next step is to divide these claims to be paid by your customers.
The car insurance premium
The amount to be paid in the mandatory civil liability coverage of motor insurance depends on the characteristics of the vehicle to be insured, such as the cylinder capacity and its category. Then, if you want to add other coverages , such as impact, collision and rollover, add these costs. They are calculated according to the value of the vehicle and the rate to be applied, which depends on the characteristics of the car, the driver’s history and the municipality of usual circulation.
Each of these covers has a specific fee that is multiplied by the capital to be insured. The sum of each coverage gives rise to the amount payable.
Life insurance premium
Life insurance guarantees the payment of a claim in the event of death or disability during the duration of the contract.
The calculation of its value is done by estimation. Using mortality tables, it is estimated how many people in every thousand will die, for each age, in the following year. Hence comes an extrapolation to identify the rate of this risk. It is this value that will be multiplied by the capital to be insured (the value of a home loan, for example). That is why, the greater the age, the higher the rate applied.
Multi-risk insurance premium
The logic of multi-risk insurance is similar to that of car insurance. Each coverage has an associated fee. Afterwards, the capital that the client wants to hold is identified, by filling and by the building. Depending on the coverage chosen, the lines are added until the final value is found.
There are, however, circumstances that can mitigate or aggravate the amount. If the dwelling is in a municipality with a reduced fire brigade, the risk of destruction in a fire is greater. Thus, the payable amount will increase. If the municipality is well served by firefighters, the value decreases.
Can I request a premium review?
It is possible to request a review of the insurance premium. However, for this to be considered, there must be a change in the terms of the contract. This happens when:
- Insured persons change : a child is born and the policyholder adds this insured person to his/her health insurance. As a result, the price will be revised higher. If you withdraw an insured person, it will be revised downwards.
- The risk changes : if you install a fire extinguisher or an armored door at home, you can request a review of the multi-risk home insurance premium because the risk has changed. In fact, there is less chance of a serious fire or theft, respectively. Therefore, the insurer may accept to soften the amount to be paid.
- Covers are added or removed : when a cover is dropped, the value is reduced accordingly.
- The customer uses the deductible to his advantage : deductibles represent savings for the customer, as they reduce the insurance premium. However, it is important to find a balance between a tariff that allows you to reduce costs and maintain efficiency.
- The law of supply and demand is taken advantage of : there are situations where there is room for maneuver to adjust the amount to the customer’s expectations. In some car insurance simulations, additional discounts can be applied to initial quotes. Therefore, you should ask several insurers for simulations and use the different responses to negotiate the best proposal. If the mediator manages to apply an additional discount, he will do so in order not to lose the deal.
When do I have to pay the insurance premium?
Payment is due upon contracting the insurance, for it to take effect. Afterwards, it will be paid on the anniversary date (whenever it completes one year from its entry into force).
Payment conditions must be defined at the beginning of the contract and can only be changed with the agreement of the parties.
There are situations in which the Insurer accepts the fractional payment of this premium. Therefore, it is possible to pay insurance every month or every quarter.
However, be careful : in many cases, payment in installments involves an additional charge. Before you decide, ask what the added costs are to make sure it’s worth it. Sometimes, when subscribing to direct debit, the insurer accepts the fractional payment, but waives the application of these charges.
What happens if I don’t pay the insurance premium?
The insurer is obliged to notify the customer, in writing, of the date of payment with an advance of 30 days. If the customer fails to do so, the insurance is not in force. And that responsibility rests with the customer.
If payment is missed and an accident occurs, the insurer may decline compensation. However, if you have chosen to split the premium, non-payment suspends the policy, but does not cancel it. If the insurer allows it, you can regularize the situation and continue with active insurance.
However, if you do not pay by the end of the annuity, the insurance will be cancelled.
Is it possible to request a refund of the prize?
There are situations where variable life insurance ends before the end of the term. In these cases, and if the insurance is paid until the end of the annuity, it is possible to request a refund of part of that amount. This return is called reversal: it corresponds to the proportional amount of time remaining until maturity. However, this is only possible in policies whose conditions allow it.
If you have car insurance or multi-risk insurance paid up to the end of the annuity and you have sold those goods in the meantime, you can request a reversal to be issued at the same time as requesting the termination of the insurance.
Can I deduct premiums paid by the IRS?
There are situations in which these expenses are deductible by the IRS. However, the legislation changes every year.
Curiosity: where does the word premium come from?
The origin of the word “prize” has been the subject of debate. The first references to this term come from the late Middle Ages and early Renaissance. At this time, trade increased, especially maritime. When a ship, loaded with goods, sank, it caused great damage. Thus, the Merchant Exchanges instituted quotas among their members to create a safety net. If the route was on the way, the Exchange paid compensation to the owners of the vessel or cargo. If it reached its destination, it received a share of the profits. This participation was called a prize. Insurance contracts have become more complex over time, but the designation of premiums to cover costs has remained.
