Policy Premium Component

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Definition

A policy premium is the amount of money paid towards the life insurance policy. The policy premium component comprises pure premium, operating expenses, investment and earning margin.

Description:

The premium is paid by the insured and the life cover is provided by the insurance company. Under insurance the risk is transferred from one party to the other after paying the premium. The policy premium is made of three components to include.

• Pure premium: Pure premium is the most important component of the insurance. It is the amount needed to cover expected losses and loss adjustment expenses.

• Operating expenses:: Operating expenses is the premium component that include sales commission, claim handling costs, taxes and other marketing costs.

• Investment and Earning margin: It includes the allowance for contingencies and underwriting profits.

Example:

Manav paid a premium of Rs.8500/- including GST. The premium included operating expenses of Rs.700/- and investment and earning margin of Rs.980/-. The remaining amount consists of premium and taxes.