Future Business Leaders of America (FBLA) Business Calculations Practice Test

Which term describes the cost of the insurance policy based on the risk associated with the insured?

1. Premium

2. Deductible

3. Claim

4. Coverage

The correct answer is: Premium

The term that describes the cost of the insurance policy based on the risk associated with the insured is known as the premium. The premium is essentially the amount that an individual or business pays for an insurance policy, which directly correlates to the level of risk the insurer has accepted. Insurers evaluate the likelihood of a claim being made, which is influenced by various factors such as the insured's past claims history, their lifestyle, and other relevant information. The premium is calculated to ensure that it covers the future claims the insurer may have to pay out, along with administrative costs and a profit margin. Therefore, a higher risk usually results in a higher premium, while a lower risk leads to a lower premium, making it a critical component of any insurance agreement. Understanding this concept is vital for anyone managing or evaluating insurance policies in a business or personal context, as it helps in budgeting and assessing the overall cost of risk management.