What is Insurance Premium? a comprehensive note

This article made a comprehensive and detailed study about the concept of Insurance Premium including meaning and definition of Premium, types, modes, grace period, return of premium and its importance.

 

1. INTRODUCTION

 

Insurance is a crucial financial tool that provides protection against unforeseen events, offering peace of mind and financial security to individuals, businesses, and organizations. When considering insurance, one of the essential factors to understand is the insurance premium. The premium is the cost you pay to the insurance company to maintain coverage for the specified risks. 

 

2. MEANING AND DEFINITION OF PREMIUM

 

Premium is a price that insurer charges from the insured, either lump sum or in instalments assured for covering some certain or ascertainable perils or risks. The price varies from insurer to insurer, as with any product or service.

 

The price of premium may also depend on the characteristics of the insured. For example, a person having frequent accident record has to pay more for auto insurance than does a person with a No-Accident record. Furthermore, it is purely a concern of insurer to accept or deny policies to persons who present an undesirable risk. For example, most insurance companies deny life or health insurance to persons suffering from chronic disease such as cancer etc.

 

In Lucena v. Crawford, Lawrence defined premium as, “a price paid adequate to the risk.”

 

The MacMillan dictionary defines premium as, “a regular payment made to an insurance company so that you are protected by the insurance.”

 

The National Insurance Company Limited defines premium as, “premium is fixed amount of sum paid over the period by insured to insurer in order to secure an insurance policy and to complete the contract of insurance.”

 

3. TYPES OF INSURANCE PREMIUMS

 

1. Life Insurance Premiums: In life insurance, the premium amount depends on the policyholder's age, health condition, lifestyle, and the chosen coverage amount. Younger and healthier individuals generally pay lower premiums since they pose a lower risk to the insurer. Premiums for life insurance can be fixed or may vary throughout the policy term.
2. Health Insurance Premiums: Health insurance premiums are determined based on age, location, pre-existing medical conditions, the type of coverage, and the number of individuals covered under the policy. Premiums for health insurance can be paid monthly, quarterly, semi-annually, or annually.
3. Auto Insurance Premiums: Auto insurance premiums are calculated considering various factors like the driver's age, driving history, the type of vehicle, and the coverage options selected. Drivers with a clean driving record often pay lower premiums compared to high-risk drivers.
4. Home Insurance Premiums: Homeowners' insurance premiums are influenced by the property's location, age, construction type, safety features, and the extent of coverage required. Additional factors like the proximity to fire stations and flood-prone areas can also impact premiums.

 

4. MODE OF PAYMENT OF PREMIUM

 

There are various modes of payment of insurance premium to make our life easier, some of which are as follows:

 

1) Payment at Branch Office

 

It is one of the simplest and popular methods of payment of premium. Policyholder can directly pay the premium amount through cash or cheque.

 

2) Payment through Banks or Agents

 

For smooth functioning some insurance companies have tie up with specific banks where policyholder can pay premium. Payment can also be

made to authorized insurance agents of the insurer.

 

3) Payment through Website

 

Now a days payment as online through the insurance company's website is one of the popular methods of premium payment. Almost all the insurance companies offer their payment service to its policyholder where one can pay his premium amount by his internet banking account or by credit card.

 

4) Electronic Clearing System (ECS)

 

ECS is an automated, simplest and one of the most convenient facilities for premium payment which debits premium from specified bank account of the insured to the insurer's specified account on due date of the payment of premium. Some more important benefits of ECS payment are that one need not remember due dates, no queue-ups for depositing cheque or cash in banks or branch offices and most importantly, keeping our policy alive because non-payment of insurance premium on due date may result into cancellation of the insurance policy.

 

5) Credit Card Standing Instruction

 

It is another mode of insurance premium payment prevalent these days, which enables the auto debit of the premium from credit card on due date.

 

6) Bill Desk

 

It is online method of insurance premium payment. For using this facility, one has to register with bill desk and choose its biller insurance. company.

 

7) Easy Bill Outlet

 

Through availing this option, the insured can pay his insurance premium at any specific designated outlet for premium collection called as 'Easy Bill Outlet. These outlets are formed by insurance companies so that policyholder can pay his premium at his nearest location.

 

8) Drop Box

 

Drop box is the box specifically designed by the insurance companies for the convenience of its customers. It is a system by which the customer can drop his cheque of amount of his insurance premium at any drop box of his insurance company.

 

5. RETURN OF PREMIUM

 

Generally, the premium once paid cannot be asked to be refunded, not even when the insured is unable to enforce his insurance policy.

 

In Sparenborg v. Edinburgh Life Assurance Co., (1912) 1 KB 195, it was held that where a policy expressly provides that premiums would not be refunded in certain events, the assured cannot claim the refund. Also, where an insurance policy is effected without interest, the premiums paid are not refundable. However, to this rule certain exceptions, further classified, have been laid down in which the refund is allowed:

 

•      a.     Return of Part Premium
•      b.     Return of Total Premium

 

a. Return of Part Premium

 

i) Express Agreement in the Policy: It may be agreed between the parties before entering into contract to return premium, wholly or partly on the happening of certain events.

 

ii) Over-Insurance: If there is over-insurance, a proportionate part of the several premiums paid is returnable.

 

iii) When the insurance company goes into liquidation process.

 

(iv) The insurer may return a part of premium if claims do not arise throughout the policy.

 

b. Return of Total Premium

 

i) If there is no fault or illegality committed by the insured, the total premium would be refundable.

 

ii) Where the fraud is committed by the insurer or the policy is void, total premium would be returnable.

 

iii) When the insurer avoids the commencement of the policy, the premium is returnable.

 

iv) If the subject-matter of the insurance is not imperiled, i.e., no risk

has been incurred by the insurer, the premium is returnable.

 

v) If the insured has no insurable interest throughout the policy, the premium is returnable.

 

vi) Where the object or consideration is illegal.

 

vii) When the parties are not in ad idem (when parties do not think at the same time about the same thing in the same manner).

 

viii) When the policy issued by a company ultra vires its power.

 

ix) Where the terms of the insurance contract are not certain or not capable of being ascertainable.

 

6. GRACE PERIOD

 

In Insurance law, grace period is a period of time in which a late performance may be made without penalty. It provides the opportunity to the customer over and above due date to make the payment for the renewal premium without lapsing the insurance policy.

 

7. IMPORTANCE OF PREMIUMS IN INSURANCE

 

Insurance premiums are the lifeblood of insurance companies, enabling them to provide financial protection to policyholders. By paying premiums, policyholders transfer the risk of potential losses to the insurer. This arrangement ensures that individuals and businesses can protect themselves against catastrophic events without facing the full financial burden.

 

Additionally, paying insurance premiums demonstrates a commitment to maintaining coverage, which can be particularly valuable for long-term policies like life insurance and retirement plans. A lapse in premium payments can lead to policy termination, leaving the insured vulnerable to unforeseen risks.

 

8. CONCLUSION

 

Insurance premiums are a fundamental aspect of any insurance policy, representing the cost of protection against potential risks. Paying regular premiums ensures that individuals and businesses can access financial assistance during challenging times, safeguarding their assets and loved ones. To make the most of insurance coverage, policyholders should diligently review their options, consider their specific requirements, and strike a balance between affordability and adequate protection. By understanding insurance premiums and their significance, you can make informed decisions to secure your future effectively.