AD Banker Comprehensive Practice Exam

In insurance terminology, what does the term 'premium' refer to?

1. The benefit amount paid to the insured

2. The amount paid by the policyholder for coverage

3. The total number of claims made

4. The cost of managing the claims process

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

The term 'premium' in insurance terminology refers specifically to the amount paid by the policyholder for coverage. This payment is made regularly, often monthly or annually, to the insurance company in exchange for the financial protection provided by the insurance policy. The premium is a critical aspect of insurance, as it directly influences the extent of coverage and the benefits that a policyholder can receive in the event of a claim. By paying the premium, policyholders ensure that they are financially protected against specified risks as detailed in their insurance policy. This payment is fundamental for the functioning of insurance, allowing the insurer to pool risk and provide necessary funds in times of loss or damage. While the benefit amount paid to the insured, the total number of claims made, and the cost of managing the claims process are important components of the insurance ecosystem, they do not define what a premium is. Instead, they are related aspects that come into play after the premium has been established and paid.