A premium is an amount of money paid to an insurer in exchange for being covered by one of their policies. The money is paid regularly, usually monthly or annually, for the policy cover. Typical examples of policies that require premiums to be paid are home insurance (contents or buildings insurance), car insurance, and health insurance.

Some companies charge slightly more for giving their customers the chance to pay by monthly direct debit rather than paying the whole amount upfront. This can make the total cost of the policy more affordable. Instead of paying a three-figure sum in one hit, the insurer allows the policyholder to pay a monthly premium. This includes a rate of interest in exchange for dividing the payments into 12 monthly amounts.

The premium is an important factor in working out which insurer to go to. You will receive certain benefits of cover in exchange for the premium. It is important to make sure the premium you pay covers you for the service you desire. It is common practice to agree to an excess on the policy. This is the amount you pay towards the loss before the insurance company picks up the rest. For example, an excess of £100 means you would meet the cost of £100 towards damages while the insurance company covers the rest. The higher the excess, the lower your premium will be, so this is an important element to think about. It is a good way to reduce the premium paid, although you should make sure you would be happy to meet the excess you choose – and could afford to do so.