What do we mean by 'premiums' in insurance?

In insurance, 'premiums' refer to the amount paid periodically by the policyholder to maintain coverage. This payment is essential as it is the price for the insurance protection that the insured receives from the insurer. Premiums can be paid monthly, quarterly, or annually, depending on the policy terms and the agreement between the insurer and the policyholder.

The payment of premiums ensures that the policyholder has a valid and active insurance policy that will provide a financial safety net in the event of a claim. The amount of the premium is influenced by various factors, including the type of coverage, the level of risk associated with the insured item or individual, and the insurer's underwriting criteria.

This understanding is foundational to grasping how insurance functions as a risk management tool, where the collective premiums from many policyholders enable the insurer to pay out claims to those who experience a loss.