What is an Advance Premium?

Malcolm Tatum

Advanced premiums are payments or benefits received prior to the date they are actually due. In some situations, this type of early payment can result in discounts or some other type of benefit for the remitter. While normally associated with the insurance industry, the concept of the advance premium can also be applied in other business settings, particularly telecommunications.

Man climbing a rope
Man climbing a rope

At times, an advance premium is extended to a customer before a purchase has been made. When this is the case, the premium is extended on the condition that the customer will follow through with the purchase within a specified period of time. When used in this fashion, the concept of the advance premium can provide a powerful incentive to do more business with the seller, owing to the additional benefit that is received from the action. Should the customer choose to not comply with these conditions, the premium is often rescinded, with the amount charged back to the customer’s account.

Telecommunications providers sometimes offer an advance premium as a means of securing long-term business. The client is offered a discounted premium that is waived for a specific period, such as one or two months. During that time, the customer is able to enjoy use of the contracted services at no charge. As long as the client complies with the terms and provisions contained in the contract, he or she is not charged for those first months of usage. In the event that the customer wishes to end the contract for any reason not covered in the provisions of the contract, the provider may choose to revoke the advance premium extended to the customer, and apply charges for those months.

Many insurance companies use the term to refer to situations where a premium is paid well before the due date. For example, if the payment on a policy is due on the first day of August, but the customer tenders the payment on the first day of July, he or she has paid an advance premium. Some insurers offer various types of rewards for making early payments, such as a slightly reduced amount, or providing the insured party with merchandise as a means of demonstrating appreciation for the early payment. Should the customer determine that paying an advance premium would yield sufficient benefit to offset any inconvenience associated with making the early payment, he or she has the chance to enjoy the rewards offered by the insurance provider. In turn, the provider enjoys the ability to make use of the funds from the premium sooner rather than later.

Mutual insurance companies are often structured as advance premium insurers. With this model, the insurer will assess premiums issued to customers based on currently known factors relevant to the industry. This is in contrast to assessment insurers, where the amount of the premium is determined based on the actual experience of the insurance provider. The issuance of advance premium rates is sometimes regulated by laws enacted in by local and national governments, a move that helps to add some degree of uniformity to the process of calculating insurance premiums.

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