Deposit Premium
An initial payment made at the start of an insurance policy, typically used for policies where the final premium cannot be determined until the policy period ends. The final premium is calculated based on actual exposure or experience, and the policyholder either receives a refund or owes additional money.
Example
“The construction company paid a $5,000 deposit premium for workers' compensation insurance, knowing the final premium would be calculated based on their actual payroll at year-end.”
Memory Tip
Think 'Deposit now, Adjust later' - you put money down first, then settle up based on what actually happened.
Why It Matters
Deposit premiums help businesses with variable operations manage cash flow by paying an estimated amount upfront rather than the potentially much higher maximum premium. This arrangement prevents overpaying for coverage while ensuring adequate protection throughout the policy period.
Common Misconception
Some policyholders think the deposit premium is their total cost and are surprised by audit adjustments. Others believe they'll automatically get money back, but if their exposure was higher than estimated, they may owe additional premium at the end of the policy period.
In Practice
ABC Manufacturing pays a $15,000 deposit premium for workers' compensation coverage based on estimated annual payroll of $2 million. At year-end audit, their actual payroll was $2.5 million due to increased business. Based on the rate of $1.50 per $100 of payroll, their true premium should be $37,500. After crediting their $15,000 deposit, they owe an additional $22,500 to complete their coverage payment.
Etymology
Combines 'deposit' from the Latin 'depositus' meaning 'to put down' with 'premium' from Latin 'praemium' meaning 'reward' or 'payment for insurance.'
Common Misspellings
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Related Terms
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See Also
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