Premium: Definition, Meanings in Finance, and Types

Premiums for insurance include the compensation the insurer receives for bearing the risk of a payout should an event occur that triggers coverage. The most common types of coverage are auto, health, and homeowners insurance. The investor thus pays a premium for an investment that will return an amount greater than existing interest rates. Premiums are paid for many types of insurance, including health, homeowners, and rental insurance. These payments must be submitted on a regular mode or schedule to continue a policy. A vehicle owner can insure the value of their vehicle against loss resulting from accident, theft, fire, and other potential problems.

What Is Another Word for Premium?

A price that exists above some sort of fundamental value is referred to as a premium, and such assets or objects are said to be trading at a premium. Assets may trade at a premium due to increased demand, limited supply, or perceptions of increased value in the future. She holds a Bachelor of Science in Finance degree from Bridgewater State University and helps develop content strategies. The annual premium or cost was $52, and the 33-year-old says she “didn’t hesitate to buy it. And as it turned out it was obviously the right decision.” Additionally, insurers would have to provide premium credits to policyholders who take steps to reduce fire dangers on their premium on stock important points related to premium on stock property, under the measure.

Merriam-Webster’s Great Big List of Words You Love to Hate

• Premiums are paid for many types of insurance, including health, homeowners, and rental insurance.
• The volatility of the market and how close the strike price is to the then-current market price also affect the premium.
• A price that exists above some sort of fundamental value is referred to as a premium, and such assets or objects are said to be trading at a premium.
• The purpose of premium pricing is to convey higher quality or desirability than other options.
• Relatedly, it is the price paid for protection from a loss, hazard, or harm (e.g., insurance or options contracts).

This excess return compensates investors for taking on the relatively higher risk of equity investing. The size of the premium varies and depends on the level of risk in a particular portfolio. Sophisticated investors sometimes sell one option (also known as writing an option) and use the premium received to cover the cost of buying the underlying instrument or another option. Buying multiple options can either increase or reduce the risk profile of the position, depending on how it is structured. The premium that is paid is its intrinsic value plus its time value; an option with a longer maturity always costs more than the same structure with a shorter maturity. The volatility of the market and how close the strike price is to the then-current market price also affect the premium.

More Words with Remarkable Origins

Options give the holder (owner) the right but not the obligation to buy or sell the underlying financial instrument at a specified strike price. The premium for a bond reflects changes in interest rates or risk profile since the issuance date. The buyer of an option has the right but not the obligation to buy (call) or sell (put) the underlying instrument at a given strike price for a given period of time. Similarly, the equity risk premium refers to an excess return that investing in the stock market provides over a risk-free rate.

• A risk premium involves returns on an asset that are expected to be in excess of the risk-free rate of return.
• The size of the premium varies and depends on the level of risk in a particular portfolio.
• Similarly, the equity risk premium refers to an excess return that investing in the stock market provides over a risk-free rate.
• The investor thus pays a premium for an investment that will return an amount greater than existing interest rates.
• The buyer of an option has the right but not the obligation to buy (call) or sell (put) the underlying instrument at a given strike price for a given period of time.
• Broadly speaking, a premium is a price paid for above and beyond some basic or intrinsic value.

Words Whose History Will Surprise You

Relatedly, it is the price paid for protection from a loss, hazard, or harm (e.g., insurance or options contracts). The word “premium” is derived from the Latin praemium, where it meant “reward” or “prize.” The purpose of premium pricing is to convey higher quality or desirability than other options. If a trust meets all 10 safety measures, it can get a rebate on its insurance premiums as well as a share of the money paid by trusts that do not meet all the goals. To pay a premium generally means to pay above the going rate for something, because of some perceived added value or due to supply and demand imbalances. To pay a premium may also refer more narrowly to making payments for an insurance policy or options contract.

Popular in Wordplay

A risk premium involves returns on an asset that are expected to be in excess of the risk-free rate of return. It represents payment to investors for tolerating the extra risk in a given investment over that of a risk-free asset. Broadly speaking, a premium is a price paid for above and beyond some basic or intrinsic value.