Legal Definitions - Premium

A premium is the payment an individual or organization makes to an insurance company in exchange for an insurance policy. This payment secures coverage and financial protection against specific, agreed-upon risks or losses as outlined in the insurance contract. Premiums can be paid as a single upfront sum or, more commonly, through regular installments over the policy's duration.

• Example 1: Car Insurance

  Maria purchases an auto insurance policy for her new car. She agrees to pay $120 every month to the insurance company. In return, the policy covers potential damages to her vehicle, liability for accidents, and other specified risks.

  Explanation: The $120 Maria pays each month is the premium. This regular payment ensures she maintains her car insurance coverage, providing her with financial protection against unforeseen events like accidents or theft.

• Example 2: Life Insurance

  John takes out a life insurance policy to provide for his family in case of his untimely death. He commits to paying a fixed amount of $500 annually to the insurer for the next 20 years.

  Explanation: The $500 annual payment John makes is the premium for his life insurance policy. By paying this premium, he ensures that his beneficiaries will receive a predetermined sum of money upon his death, offering them financial security.

• Example 3: Business Property Insurance

  A local bakery, "Sweet Treats," buys a commercial property insurance policy to protect its building, equipment, and inventory from risks like fire, theft, or natural disasters. They pay a lump sum of $3,000 at the beginning of the year for this coverage.

  Explanation: The $3,000 one-time payment made by Sweet Treats is the premium for their business property insurance. This premium secures their policy, which will help cover the costs of repairs or replacement if their business property is damaged by a covered event.