In insurance terminology, the 'premium' is best defined as:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The premium is the entire consideration the insured pays to obtain insurance coverage. It is the price of the policy, expressed as a total amount for the coverage and the policy period. The rate, by contrast, is the cost per unit of insurance, for example, a specified amount per one thousand dollars of life insurance coverage or per unit of exposure. The premium is computed by applying the rate to the number of units and the policy term. Understanding the difference between rate and premium is basic to how insurance is priced, how premium payments are structured, and how adjustments such as premium refunds or audits are handled. Producers should be able to explain both concepts accurately to clients.
Why the other options are wrong
- B) The cost per unit of insurance, such as a stated amount per one thousand dollars of coverage, is the rate, not the premium. The premium is the total amount the insured pays, which is the rate multiplied by the number of units of coverage and the policy period.
- C) The producer's commission is a portion of the premium that the insurer pays to the agent or broker for the sale. It is not the price the insured pays for coverage; the premium is the full consideration paid by the insured to the insurer for the policy.
- D) A refund issued when a policy is cancelled is a return of the unearned premium, the portion of the premium covering a period that never ran. It is a refund of premium, not the premium itself, which is the amount paid for the coverage.
Memory hook
The rate is the per-unit cost; the premium is the total bill.