An insurance premium is the price a policyholder pays an insurer in exchange for cover, charged either as a single annual sum or in monthly instalments. It reflects the insurer's assessment of risk plus Insurance Premium Tax and any arrangement fees.
In one line: An insurance premium is the amount paid to an insurer to buy and keep a policy in force.
How an insurance premium works
The premium is calculated by underwriters who weigh the likelihood and size of a future claim against the cover offered. The Financial Conduct Authority requires the total annual cost to be shown clearly before purchase.
On a motor policy quoted at 600 GBP, paying monthly might add interest of around 60 GBP across the year, so the same cover costs about 660 GBP spread over twelve instalments versus 600 GBP paid in one go.
Insurance Premium Tax is added on top at the standard rate of 12% (HMRC, 2026-27), so the displayed price already includes that charge.
Premium vs excess
The premium buys the policy and is paid whether or not a claim ever occurs. The excess is a separate contribution paid only when claiming, so the two costs are not interchangeable.
Choosing a higher voluntary excess typically reduces the premium, because the policyholder agrees to absorb more of each individual loss.
Primary source: FCA: Insurance
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