DEFINITION of 'Valuation Premium'

The rate set by a life insurance company based on the value of the company's policy reserves. The valuation premium is calculated by an insurance company. The company ensures that, first and foremost, it has adequate policy reserves to cover payouts. Once the value of the policy reserves is determined, the insurance company can calculate the valuation premium that will cover its liabilities. In this manner, the insurance company can make sure that it will have the assets necessary to cover all of its policies.

BREAKING DOWN 'Valuation Premium'

A valuation premium is a life insurance calculation that bases charges for premiums on the company's liabilities. At times, an insurance company may opt to set a premium that is lower than the calculated valuation premium if their experience and statistical records indicate that a lower premium is justified. In the event that a lower premium is charged, the insurance company would be obligated to hold the difference in a deficiency reserve.

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