Washington State Insurance Practice Exam

What is "premium tax" in relation to insurance?

1. A tax applied to the premiums collected by insurance companies

2. A tax on insurance claims paid to policyholders

3. A fee paid by consumers for insurance services

4. A charge for underwriting expenses by insurers

The correct answer is: A tax applied to the premiums collected by insurance companies

Premium tax refers specifically to the tax that state governments impose on the premiums collected by insurance companies from their policyholders. This tax is levied as a percentage of the total premiums that an insurer collects during a specified period, usually a year. The revenue generated from premium taxes goes to the state’s general revenue, supporting various public services, including education and infrastructure. The reason why the other options do not fit the definition of premium tax is that they pertain to different aspects of insurance finance. Taxes on claims or fees paid by consumers for services relate to different financial transactions and responsibilities within the insurance industry. Similarly, charges for underwriting expenses relate to costs incurred by insurance companies in assessing risk, not tax obligations. Therefore, the correct understanding of premium tax centers solely on the taxation of premiums collected by insurers, making the chosen option the accurate representation of the term.