What Is a Deferred Premium?
Insurance policies protect people and businesses from risk or losses. Some examples include insurance for vehicles, health, property, and even life. The premium is the cost the consumer or business pays an insurance company for a specific amount of coverage. Some insurance companies offer insurance policies with a deferred premium. Under a deferred premium policy, the buyer is able to pay the premium in installments over time, instead of paying the entire cost in one lump sun.
Each insurance firm calculates the premium for policy holders based on the level of risk. For example, a driver with numerous traffic offenses brings greater risk than a very safe driver, and thus will typically pay a higher premium. The exact process of determining these premiums is left to actuarial professionals who specialize in mathematics related to insurance risk.
Under a standard lump-sum insurance agreement, the buyer must pay the entire premium up front. If the insurance company offers a deferred premium, the buyer can take advantage of insurance coverage now, but pay the premium in installments. These installments are calculated by dividing the total amount of the premium by the total number of payments. A deferred premium may be paid on a semi-annual, quarterly, or monthly basis depending on the policy of the firm and the credit worthiness of the customer. Generally, insurance companies add a fee to each deferred payment to help cover administrative costs associated with processing these payments.
Both buyers and sellers can benefit from a deferred premium arrangement. The buyer is able to spread his payments out over time, rather than spending a large sum of money all at once. He also enjoys cover and protection immediately, instead of waiting until he has saved up the entire amount of the premium. A deferred premium policy may also help insurance companies sell more policies because customers are better equipped to afford these installment payments rather than a lump sum. This helps to spread out risk over a wider pool of people, which can lower costs for everyone involved.
A deferred premium insurance policy can have important tax and insurance implications. While laws and codes vary by location, many tax standards require a business to record a deferred premium as income only when the coverage is provided for that specific period. For example, a company that charges a customer monthly for an annual policy only needs to recognize one-twelfth of the total premium cost on each month's accounting records. The business does not need to record the entire cost of the premium as income until the end of the year.
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