Financial terms you should know
Insurance Premium: Premium is an amount paid periodically to the insurer by the insured for covering his risk.
Description: In an insurance contract, the risk is transferred from the insured to the insurer. For taking this risk, the insurer charges an amount called the premium.
The premium is a function of a number of variables like age, type of employment, medical conditions, etc. The actuaries are entrusted with the responsibility of ascertaining the correct premium of an insured. The premium paying frequency can be different. It can be paid in monthly, quarterly, semi-annually, annually or in a single premium.
Renewal Premium: Renewal premiums are the subsequent premiums that are paid by the insured to the insurer in order to keep the policy in operation and avail the benefits of the policy accordingly.
Description: If a policy holder fails to pay the premiums, then his policy lapses after a grace period. The renewal premiums are paid after the initial premium and are indispensable for the continuation of the policy.
Unearned Premiums: Unearned premium is that part of the overall premium which is collected by the insurance companies beforehand, but for which protection is not provided. Description: The premium is collected in advance by the insurer, but the insurer needs to pay back the premium to the insured in the event of cancellation of the policy. As this is an unearned income, the same is treated as a liability in the balance sheet of an insurance company. ✴✴✴ Premium Waiver Benefit: A benefit wherein the future premium payments by the insured are waived off under certain conditions is called premium waiver benefit. This benefit can be availed usually in case of accident, disability or death of the person who was paying the premiums when the insured is incapable of paying premiums due to his loss of revenue. Description: Usually insurance policies include the premium waiver clause, but in some cases an extra fee is charged to attain waiver of premium benefit.
The premium waiver rider is beneficial in the event of any unforeseen exigency resulting in a complete or substantial loss of income to the insured. In this case, the policy will not lapse even if the premiums cease. The rider however entails some cost in the form of increased premiums. ✴✴✴
Premium Paying Term: Premium paying term is the total number of years for the policy holder to pay the premium.
Definition: Policy term is normally equal to the premium paying term. However, some insurance policies give the insured the autonomy to choose a premium paying term lower than the policy term. For instance, insurers allow the insured to get the insurance benefits even if they stop the premium payments after a stipulated period of time by converting the normal insurance policy into a paid up policy.
Here the sum assured will be calculated by using
the formula.
(Total number of premiums paid/Total number of premiums payable) X Sum Assured + vested bonus (if any)