Washington State Insurance Practice Exam

Define "premium" in the context of insurance.

1. The amount paid by the insured for coverage

2. The total amount of claims paid out

3. The surplus amount a company retains

4. Any fees associated with policy changes

The correct answer is: The amount paid by the insured for coverage

In the context of insurance, "premium" refers to the amount paid by the insured to the insurance company in exchange for coverage. This payment is typically made on a regular basis, such as monthly or annually, and is a fundamental concept in insurance contracts. The premium is determined based on various factors, including the level of coverage, the insured's risk profile, and the underwriting guidelines of the insurer. Understanding the premium is crucial, as it represents the core financial transaction between the policyholder and the insurer. It allows individuals and businesses to transfer the risk of potential financial losses to the insurance company in return for a predetermined cost. This is why the correct answer highlights the premium as the payment for coverage, distinguishing it from other financial aspects of an insurance policy, such as claims paid or administrative fees.