DEFINITION of 'Compensating Balances Plan'

A type of premium paid by an insured business. Compensating balances plans allow firms to subtract various expenses from the premiums that they pay to their carriers. This allows the business to divert this portion of the premium to a separate account from which it can draw.

BREAKING DOWN 'Compensating Balances Plan'

Compensating balances plans allow insured firms to subtract costs like the cost of carrying the policy, premium taxes and profit from the premiums that they pay. This plan effectively lowers the cost of insurance for businesses. Firms can use the money diverted into their account for practically any reason they choose.

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