Premium

AAA

DEFINITION of 'Premium'

1. The total cost of an option.

2. The difference between the higher price paid for a fixed-income security and the security's face amount at issue.

3. The specified amount of payment required periodically by an insurer to provide coverage under a given insurance plan for a defined period of time. The premium is paid by the insured party to the insurer, and primarily compensates the insurer for bearing the risk of a payout should the insurance agreement's coverage be required.

INVESTOPEDIA EXPLAINS 'Premium'

1. The premium of an option is basically the sum of the option's intrinsic and time value. It is important to note that volatility also affects the premium.

2. If a fixed-income security (bond) is purchased at a premium, existing interest rates are lower than the coupon rate. Investors pay a premium for an investment that will return an amount greater than existing interest rates.

3. A common example of an insurance premium comes from auto insurance. A vehicle owner can insure the value of his or her vehicle against loss resulting from accident, theft and other potential problems. The owner usually pays a fixed premium amount in exchange for the insurance company's guarantee to cover any economic losses incurred under the scope of the agreement.

RELATED TERMS
  1. At A Discount

    This specifically refers to stock that is sold for less than ...
  2. Non-Scheduled Personal Property

    Refers to the items that are automatically covered under your ...
  3. At A Premium

    The sale of an asset or item at a price significantly above the ...
  4. Premium Income

    1. In investing, income that is earned through the sale of an ...
  5. Benefit Period

    The benefit period is the length of time during which a benefit ...
  6. Insurance Proceeds

    The benefit proceeds paid out by any type of insurance policy ...
RELATED FAQS
  1. What are some examples of industries that practice price discrimination?

    Individuals can transfer the risk of financial loss from a wide variety of sources to a third party through the purchase ... Read Full Answer >>
  2. What are some examples of horizontal integration?

    One option strategy that can help you earn additional income in the automotive sector is to sell covered calls against long ... Read Full Answer >>
  3. What caused the European / Eurozone debt crisis?

    Insurance companies base premium pricing on the amount of risk they take on for each individual policy. For instance, life ... Read Full Answer >>
  4. How can I use the combined ratio to compare insurance companies?

    Use the combined ratio to compare the profitability of insurance companies and how well the companies' operations are performing. ... Read Full Answer >>
  5. How do I calculate the combined ratio in Excel?

    You can calculate the combined ratio on Microsoft Excel after you retrieve an insurance company's report of its losses incurred, ... Read Full Answer >>
  6. How do companies use price discrimination?

    Price discrimination is a strategy that companies use to charge different prices for the same goods or services to different ... Read Full Answer >>
  7. How does being overweight affect my healthcare costs?

    Obesity and being overweight result in higher costs for individuals and for the broader health-care sector. In the United ... Read Full Answer >>
  8. What does the lapse ratio in the insurance sector measure?

    The lapse ratio measures the amount of insurance policy renewals with respect to the total number of insurance policies at ... Read Full Answer >>
  9. How can a reverse mortgage help wealthy and poor retirees?

    Reverse mortgages can help both wealthy and poor retirees, as they allow seniors to borrow against their home equity, receiving ... Read Full Answer >>
Related Articles
  1. Home & Auto

    Prepare Your Finances To Handle Natural Disasters

    Use these easy tips to protect your financial interests from natural disasters.
  2. Insurance

    Can I Get Life Insurance?

    Find out what you can do to get the coverage you need for the right price.
  3. Home & Auto

    How An Insurance Company Determines Your Premiums

    Find out how insurers use credit history to build an insurance score and how it could affect your bottom line.
  4. Entrepreneurship

    Women And Finances: Is There A Gender Bias?

    Uncover some very complex reasons for female gender biases in the finance world.
  5. Home & Auto

    Exploring Advanced Insurance Contract Fundamentals

    Understanding your contract can help you protect our family's financial security.
  6. Insurance

    Should You Bite On Dental Insurance?

    Don't pay for a plan that won't cover your pearly whites when you need it to.
  7. Taxes

    Avoid Tricky Tax Issues On Municipal Bonds

    Learn the rules every investor should know before buying into this "tax-free" investment.
  8. Options & Futures

    Beginner's Guide To Auto Insurance

    Find the perfect policy that suits both your coverage and budgetary needs.
  9. Active Trading Fundamentals

    Using Logic To Examine Risk

    Know your odds before you put your money on the table.
  10. Options & Futures

    Options Basics Tutorial

    Discover the world of options, from primary concepts to how options work and why you might use them.

You May Also Like

Hot Definitions
  1. Unlevered Beta

    A type of metric that compares the risk of an unlevered company to the risk of the market. The unlevered beta is the beta ...
  2. Moving Average - MA

    A widely used indicator in technical analysis that helps smooth out price action by filtering out the “noise” from random ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Productivity

    An economic measure of output per unit of input. Inputs include labor and capital, while output is typically measured in ...
  5. Variance

    The spread between numbers in a data set, measuring Variance is calculated by taking the differences between each number ...
  6. Terminal Value - TV

    The value of a bond at maturity, or of an asset at a specified, future valuation date, taking into account factors such as ...
Trading Center