Valuation Premium

What Is a Valuation Premium?

A valuation premium is a life insurance calculation that determines the charges for premiums in view of the company's liabilities. Insurance companies charge month to month premiums or fees to their policyholders, and in exchange, give financial coverage to an event, like death. The premiums that are collected from their clients — called reserves — are generally held in short term investments.

While determining the valuation premium, the insurance company must guarantee that it has adequate policy reserves to cover [payouts](/payout, for example, a death benefit. An insurance company's policy reserve addresses the present value — or the present value — of all representing things to come cash flows or premiums it's due to receive. The total amount of liability for an insurer is the sum of the reserves for each individual policy.

Figuring out a Valuation Premium

Life insurance is a contract between an insurer and a policyholder where the insurance company guarantees payment of a death benefit to named beneficiaries upon the death of the insured. The insurance company guarantees a death benefit in consideration of the payment of premiums by the insured.

The amount of insurance premiums charged by the insurance companies is determined by statistics and mathematical calculations done by the underwriting department of the insurance company. The underwriting system includes exploring familial sicknesses and dissecting records like medical data and motor vehicle reports. Analysts employed by the insurance company, known as actuaries, dissect the data and endeavor to foresee how likely the insurance candidate will be to file a claim on their policy. The higher the likelihood of a claim, the higher the premiums typically are for the policyholders.

The life insurance company's valuation premium is the total amount of premiums paid by policyholders set to the side for ordered reserves. Regulated insurers are required to offset their assets to cover liabilities. When the insurer determines the value of its policy reserves, the company can compute the valuation premium that will cover its liabilities. Thusly, the insurance company can ensure that it will have the assets important to cover every one of its policies.

Benefits of a Valuation Premium

Valuation premiums assist with guaranteeing an insurance company stays financially solvent and has the ability to pay any claims that might emerge from its policies. Higher valuation premiums will generally relate with higher risks and values of covered assets or things.

On occasion, an insurance company might opt to set a premium lower than the calculated valuation premium in the event that its experience and statistical records show that a lower premium is justified. In the event that a lower premium is charged, the insurance company would be committed to hold the difference in a deficiency reserve.

Features

• When the value of the policy reserves has been determined, the insurer can work out the valuation premium to cover its liabilities.
• While determining the valuation premium, the company initially guarantees that it has adequate policy reserves to cover payouts.
• Higher valuation premiums relate with higher risks and values of covered assets or things.
• A valuation premium is a rate set by a life insurance company in view of the value of the company's policy reserves.