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You are here: Home / Others / Insurance premium in Nigeria explained – Meaning and everything you should know

Insurance premium in Nigeria explained – Meaning and everything you should know

May 27, 2021 by Get Insurance Today

Insurance is the transaction of exchanging money for risk transfer. When this transaction goes through, they compensate you should any damages come to your insured asset. Now, in a more professional statement; it means exchanging insurance premium for risk transfer. The money you pay to purchase insurance is called an insurance premium. In this article, we would be discussing insurance premium in depth, bringing to you everything that you should know.

insurance-premium-in-nigeria

 

What is insurance premium?

An insurance premium is simply the sum that an organization or individual pays for an insurance policy. This policy could be of any kind, ranging from auto to home, life, and healthcare insurance. The premium stands as a liability for the insurance company, on which it mandates them to provide coverage according to the policy. However, it is also the profit of the insurance company.  

For the policy to remain valid, the insured must make regular insurance premium payments as agreed. Failure to do so could result in the cancellation of the policy.  When this happens, the insured is no longer covered by the insurer, and the company would bear no losses incurred during that period.

Depending on the type of insurance company, immediately you purchase a policy, they might require you to pay the premium in full. However, some insurer allows premium payment in installments; monthly, semiannually, or annually.

What are the factors that determine the price of an insurance premium?

The factors that an insurer considers before setting an insurance premium include:

  1. Type and nature of coverage
  2. The age of the insured
  3. Employment status
  4. The insured habits like smoking or drinking
  5. Medical conditions of the insured
  6. The area where the insured lives
  7. History of filed claims in the past
  8. Moral hazard and diverse selection
  9. Odds of a claim being made
  10. Level of competition faced by the insurer

What are the types of insurance premium?

The types of insurance premiums are:

Paid premium: 

Premium paid could come in either of a fixed premium or flexible premium. For the fixed premium, the amount remains unchanged till the policy matures. Flexible premium, on the other hand, allows the policyholder to change details in the policy. These changes could be the number of people covered, or the sum assured. After making changes, the insurer also calculates a new premium based on the change.

Insurance purchased: 

In this type of insurance premium, payments are calculated based on the insurance policy in question. For example, the insurance premium on a life insurance would differ from that of health or auto insurance. This is because each of these policies considers different factors before reaching a premium payment.

What mode of payment does insurance premium employ?

The mode in which you pay an insurance policy depends on how frequently it is to be paid based on agreement. The different modes available are:

  1. Lump sum: 

lump sum is straightforward, you have to pay the whole sum before the policy kicks into effect.

  1. Monthly: 

for monthly, you are allowed to pay every month. Although this looks cheaper and easier to pay, in the long run, you would pay a higher policy sum.

  1. Quarterly: 

insurance premiums are paid every three months, hence four times in a year. They are cheaper than monthly insurance.  

  1. Semiannually: 

the insurance premium goes a step further and is paid every six months. Semiannual payments are cheaper than quarterly.

  1. Annually: 

Lastly, annual parents are made only once a year. Although they might look hard and more expensive than the rest, they are the most cost effective in the long run.   

What are gross and net premium?

Gross simply means the sum before deduction, and net the sum after deductions. A net premium means that refunds, refunds, and premiums paid for reinsurance have been deducted. For gross on the other hand, they have not deducted these expenses. Under gross, the premium has been adjusted upwards to include insurer expenses.

Conclusion

Before you purchase a policy, it is important that you understand insurance premiums and how it works. This way, you can gauge the value of what you would receive, with respect to its price. Annual payments remain the most cost effective insurance premium, although it looks too expensive at a glance. 

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