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What Is a Premium?

In business or healthcare, a premium can have a variety of different meanings. In investments, a premium is the net cost of purchasing an option.

Whereas, it can also be the set amount of money that an insurer requires from you on a regular schedule in order to have a secure health insurance plan. The cost of a premium is one of the most important things to remember.

This is due to the fact that it determines how much you can pay for the coverage you get. Regardless of the kind of insurance you choose, you would have to pay a predetermined amount on a daily basis.

How Does a Premium Work?

A variety of factors influence different types of premiums such as your age and your health condition. Premiums for insurance typically have a standard cost and will have discounts that get applied based on where you live, your personal records, and a variety of other information.

Depending on the insurance and billing package you use, you can pay the premium annually, weekly, even once a year. The cost is determined by the type of coverage you need as well as the risk involved.

Bond Price Premium

A premium indicates changes in interest rates for a bond since it was issued. With bond price premiums the prices are inversely proportional to the interest rates.

When a fixed-income security is acquired, it ensures the prevailing interest rates are cheaper than the bond’s coupon rate. If interest rates rise, the stock price of a bond drops, and vice versa.

Bonds selling at a premium indicates it is being sold for more than its face value. Bond portfolios can be assessed based on a forecast of short and long-term interest rates.

Consumers will pay a premium on an opportunity that will yield a higher return than current interest rates. There are always external factors that affect the bond’s working capital so it should be weighed against other investment options.

How To Calculate a Bond Premium Calculated?

The bond premium can be calculated by subtracting the bond’s undiscounted maturity amount from the current value of potential interest payments and the maturity amount.

Why Would Anyone Buy a Bond at a Premium?

An individual will pay a premium for a bond because the specified interest rate is higher than the industry’s expectations. If a bond’s interest payments exceed the market’s estimated interest payments, the bond would sell for more than its maturity value.

Insurance Premiums

The payment the insurer gets for assuming the burden of a payout if an accident occurs is included in insurance premiums. There are many types of insurance premiums such as health, auto insurance, and rental insurance.

In most cases, the customer pays a set rate in return for the insurance company’s promise to offset all financial losses suffered. When customers look around for insurance, they can discover that different insurance providers charge different rates for the same coverage, allowing them to pick the option that best suits them.

Is a Premium the Same as a Deductible?

The amount of money paid by your insurance provider for the package you’ve selected is referred to as a premium. A deductible is how much you must spend on your medical expenses each year until your insurance provider begins to pay.

A deductible is a way for you to contribute to your medical bills in exchange for a reduced rate. A high-deductible payment can lead to significant savings, but it can make it harder to manage your finances because you’re spending more on bills. 

Is it Better to Have a Higher Premium or Deductible?

If you have a choice, choose the highest deductible rate that you can afford. Lower deductibles often result in increased premiums, while higher deductibles will lead to a lower premium.

For those that need constant care, insurance plans with high annual premiums but smaller deductibles are normally a safe option.

Option Premium

The selling price of an option contract is referred to as the option premium. It is the price one has to pay in order to obtain an options contract.

When you purchase an option, you are paying a premium for the right to sell it at a predetermined price agreed upon at the time of purchase. You are obtaining the right to exchange the underlying asset at a fixed price for a specified period of time.

An options premium is determined by the seller of that options contract.

How To Calculate an Option’s Premium

Option premiums are determined by adding the intrinsic value of an option and the time value of that option. Let’s say an option has an intrinsic value of $25 and a time value of $25. In order to acquire this option, you would have to spend $50 on its premium.

It is important to note the underlying factors that affect the price of an option’s premium. Like, the strike price compared to the actual underlying price of that stock (intrinsic value), the time value or time until maturity of that options contract, and lastly, the underlying assets volatility.

Do Investors Get the Premium Back on Options?

No, investors would not get the premium back on any options.

Getting Help Understanding Premiums

As you read, premium can mean a variety of different things. A premium in health care, is the set amount of money that an insurer requires from you on a regular schedule in order to have a secure health insurance plan.

In terms of investments, a premium is the amount necessary in order to acquire an options contract. These two type of premiums, while talking about different business sectors, ultimately talk about the same thing; an upfront payment in exchange for something of value in the future.

Financial advisors are well versed in personal financial planning and can teach you how to manage your money whether it’s with health insurance or through investing. Hiring a financial advisor can definitely be a worthwhile investment because they will help you build your money as you learn from an experienced professional. You should consider contacting a financial advisor to help you start investing and saving today!