A premium generally refers to an amount paid above a basic or intrinsic value. In finance and insurance, it has several specific meanings:
- In insurance, a premium is the amount of money paid regularly (monthly, annually, etc.) to an insurance company to maintain coverage for a defined period. It compensates the insurer for bearing the risk of a potential loss or claim. For example, auto, health, and homeowners insurance all require payment of premiums to keep the policy active
- In the context of securities, a premium can mean the price paid for a bond or stock above its par (face) value. For bonds, this occurs when the bond's interest rate is higher than current market rates, causing it to trade at a premium. For stocks, a premium refers to the amount investors pay over the stock's par value when shares are issued
- More broadly, a premium can also mean any additional cost or fee charged beyond a standard price, or a higher price paid for something considered superior or in demand
In summary, a premium is an extra payment made either for insurance coverage or for acquiring financial assets above their nominal value, often reflecting added value, risk coverage, or market conditions.
