Insurance Broker Certification Practice Exam

What is meant by 'premium' in the context of insurance?

1. The benefit paid to the policyholder

2. The amount paid by the insured for coverage

3. The risk assessment fee

4. The administrative charge by the insurer

The correct answer is: The amount paid by the insured for coverage

In the context of insurance, the term 'premium' refers to the amount of money that the insured pays to the insurance company in exchange for coverage. This payment can be made as a one-time payment or through regular installments, such as monthly, quarterly, or annually. The premium is a crucial aspect of the insurance contract because it determines the insured's access to the benefits of the policy should a covered event occur. Understanding that the premium is essentially the cost of purchasing the policy is key. It reflects the insurer's assessment of the risks associated with insuring the individual or entity and ensures that the company can cover potential claims as they arise. The relationship between the premium, the coverage provided, and the risk factors is foundational to insurance principles.