Valuation Premium

What Does Valuation Premium Mean?

A valuation premium, in the context of insurance, refers to the rate set by an insurance company based on its policy reserves and liabilities. After determining that the policy reserves are sufficient to cover payouts, the insurer calculates a valuation premium to cover its liabilities. This ensures that the insurance company has enough assets to meet its policy obligations.

Insuranceopedia Explains Valuation Premium

Calculating a valuation premium ensures that the insurer remains financially solvent and has the necessary resources to address any claims arising from the policies it underwrites. Therefore, the higher the risk or the greater the value of the covered asset or item, the higher the valuation premium is likely to be. However, an insurance company may choose to set the premium lower than the calculated amount if statistical records and experience justify this decision. In such cases, the insurer must establish a deficiency reserve to cover the difference.

Valuation premiums are one of several factors that affect life insurance premiums, since an insurer’s reserve requirements directly influence the rates policyholders pay. For a breakdown of typical pricing across age groups and policy types, see our guide on how much life insurance costs.