Advance Premium

What is 'Advance Premium'

An advance premium is an initial premium paid to bind an insurance policy for a given period of time. The most commonly known use of the term "advance premium," is with respect to fluctuating insurance payments, such as payroll-based policies, where the actual amount due is not known until after the fact.

BREAKING DOWN 'Advance Premium'

Advance premium can also refer to pre-paid premiums, where the policyholder makes a premium payment before it is due.

Some insurance premiums are actually due in advance of coverage being extended, and the non-payment of premium will result in policy cancellation. Insurance companies calculate the premium down to the day, and apportion your premium due on that basis. You have probably noticed that you pay a little more premium at the start of your policy, and sometimes do not have payments towards the end of the policy term. By calculating and collecting premium in advance, the insurance company will not extend you any coverage prior to your payment of premium.

When you purchase home insurance, you are protecting yourself from future claims that will cause you financial loss. However, the risk of loss is uncertain and insurance, to a certain extent, is a gamble. If you were to pay insurance in arrears, such as you do with your home mortgage, the insurance company would have extended coverage and potentially suffered a loss without you paying any premium. If this practice were allowed, insurance companies would go out of business because consumers would only pay premiums after they have suffered a claim.

Advance Premiums and Automobile Insurance

In the case of automobile insurance, insurers must collect an advance premium in order to provide a form of backup to be used in case of a claim. Premiums are usually billed on a monthly basis, and each monthly payment is for coverage during the next month. Previously, auto insurance policyholders could only pay for auto insurance for six months or one year in advance. This required drivers to exercise forethought and budgeting in order to ensure they had enough cash to foot that annual or semi-annual bill. As more states started requiring their drivers to have auto insurance, insurers began availing insurance policies with monthly payments.

Another benefit of advance monthly premium payments is that policyholders will know the due date of their car insurance rather than waiting for the annual bill from their insurer. In such cases, a policyholder can set up automated payments through a debit or credit card. Most insurance companies also have web portals from where a policyholder can check and pay monthly payments.