Indiana State Life and Health Insurance Practice Exam

What is an insurance premium?

1. The amount paid for insurance coverage

2. A policyholder's dividend

3. The claim amount payable by the insurer

4. A fee for policy modification

The correct answer is: The amount paid for insurance coverage

The correct answer is the amount paid for insurance coverage. An insurance premium is essentially the cost that a policyholder pays to the insurance company in exchange for the insurer's promise to provide financial protection against certain risks as outlined in the insurance policy. This payment is fundamental to the insurance contract and is typically required on a regular basis—such as monthly, quarterly, or annually—depending on the terms agreed upon at the onset of the policy. The other options do not accurately describe what a premium is. A policyholder's dividend refers specifically to a return of surplus money to members of a mutual insurance company—it's not a payment made for coverage. The claim amount payable by the insurer relates to the sum that the insurance company is obligated to pay to the policyholder upon a valid claim, which is separate from the ongoing premium payments. Lastly, a fee for policy modification might be encountered when making changes to a policy and does not represent the core concept of a premium, which is strictly about securing insurance coverage. Understanding this distinction is crucial for grasping the basics of how insurance works.