A gross premium is the total amount that is paid in exchange for securing some type of ongoing good or service. This type of cost or premium is usually bundled into a single amount and presented to the buyer, making it easy to make a single payment rather than paying for each of the line items that go into the overall premium. On the back end, the seller allocates a portion of the gross premium to each of the line items, effectively covering all the expenses involved while still making a profit from the transaction.
The concept of the gross premium is most commonly used in the extension of insurance coverage. Typically, the figure is the net premium, which represents the amount that has to do with the extension of specific benefits to the policyholder. Along with the net premium, the gross premium will also include any additional charges for the management of the insurance account, plus any commissions that may be due the insurance agent who sold the account. The exact components that go into this premium will vary somewhat, depending on whether the coverage involved has to do with life insurance, health insurance, or automobile coverage.
The gross premium also represents the total received from the client before any type of taxes are deducted from that amount, as well as any discounts that the seller may choose to provide to the buyer. This means that if a client is extended a ten percent discount, that amount will be deducted along with taxes and other expenses from the gross amount paid by the client. This allows the seller to accurately track the breakdown of expenses associated with each account, which in turn makes it easier to calculate commissions, taxes, and other expenses in a manner that is in compliance with tax laws and the terms of the commission structure. When the buyer is due a discount, this will often appear as a credit on the account statement or invoice, with the amount of that credit subtracted from the gross premium and the total amount for the customer to pay noted below the application of that credit.
The gross premium may also represent the prevailing figure before other types or credits are applied to a financial account. For example, with life insurance policies, the gross figure for the premium reflects an amount that is in place before any type of dividends generated on that account are deducted. Since there is some variance in how the term is used, it is often helpful to obtain specific information from a seller as to what is considered part of the gross premium, and what type of fees, expenses, or discounts are subsequently deducted to arrive at the net premium.
