Future Business Leaders of America (FBLA) Business Law Practice Exam

What does the term premium refer to in insurance?

1. The amount of coverage a policy offers

2. The amount of money an insured pays for coverage

3. The duration of the insurance policy

4. The type of insurance being purchased

The correct answer is: The amount of money an insured pays for coverage

The term premium in insurance specifically refers to the amount of money that an insured individual or entity pays to the insurance company in exchange for coverage. This payment can be made annually, semi-annually, quarterly, or monthly, depending on the policy terms agreed upon. The premium is a crucial component of an insurance contract, as it establishes the financial commitment made by the policyholder in return for the protection and benefits provided by the insurer. Understanding the premium is essential because it does not relate to the specific coverage limits, the length of the insurance policy, or the type of insurance being purchased. Instead, it solely signifies the cost involved in maintaining the insurance coverage. Therefore, this concept forms the foundational financial element of an insurance policy, with implications for both the affordability for the insured and the revenue for the insurer.