# What is the insurance premium? How is it calculated?

#### ByEfrain P. Mains

Nov 11, 2022

Almost everyone uses some form of insurance . Whether car, home, life or health, we have all taken out some insurance in our lives and we know how the procedure is: we pay a fee, called a premium, and if we have an accident, the insurance pays. But what is that insurance premium and how is it composed? Next, we will tell you all the information.

## What is the insurance premium? How is it calculated?

The insurance premium is the price of the insurance , that is, the price that the insured pays for the coverage that he receives from the insured risk to his insurance company. In this way, the insurance company, when collecting the premium, is forced to comply with the coverage stipulated in the insurance policy.

The  obligations  of the parties to the insurance contract, in this sense, would be:

• the  policyholder  (the company’s client) is obliged to pay the premium in accordance with the conditions described in the insurance policy.
• The  insurance company  undertakes to indemnify or satisfy a capital, an income or other agreed benefits in the event that the event occurs whose risk is subject to coverage.

## What does the price of the premium depend on?

First of all, the amount of the premium  depends on the type of risk insured  and is fixed in advance by the insurance company. In addition, the price of the premium must be sufficient for the insurer to deal with the insured claims.

But the  type of risk  is not the only variant that determines the price or amount of the premium charged by the insurance company. Other factors to consider are:

• Contract period
• the insured capital
• factors specific to the type of insurance

This last point is very broad, and depends on the type of insurance or the insured property. For example, in the case of  car insurance,  the factors that will influence the calculation of the insurance premium, in addition to those described, will be:

• driving history
• Use given to the car and number of km traveled per year
• driver’s age
• vehicle type

## How is the insurance premium calculated?

• Pure premium: this is the current value of the insured risk based on the statistics carried out and the technical interest rate attributed
• Total premium: rate premium +  taxes, Insurance Compensation Consortium, Settlement Commission of Insurance Entities…

• Single premium: premium that is faced by a single payment during the duration of the insurance. It is the least frequent modality.
• Periodic premium: premium that is paid in regular installments during the duration of the insurance, such as annually.
• Installed premium: annual premium that is settled through periodic payments lower than the annual one. In case of loss, the insurance company can claim the rest of the unpaid portions of the premium from the insured.
• Fractional premium: it is calculated for a period of less than one year. In the event of an accident, the insurance company will pay the compensation without demanding payment of the rest of the premium from the insured.

## When do I have to pay the insurance premium?

The first insurance premium must be paid at the time the insurance policy is signed in order to be covered for the insured risk. Next, the insurance premium will be paid at the expiration of the policy, in case it is not paid, the insured will have a month of grace to make the payment of the premium.

It should be noted that five months after not having paid the insurance premium, the coverage will be suspended and the insurance company will not compensate in the event of an accident. As of the sixth month from the expiration of the insurance, it will be rescinded.

On the other hand, as soon as the premium payment is made, the insurance coverage will take effect in 24 hours.