Finance glossary
Premium
Also known as: Insurance premium
In simple terms
A premium is the price you pay for insurance — usually a set amount each month or a single yearly payment — in return for the insurer covering you if something goes wrong.
On this page
What does premium mean?
A premium is the cost of an insurance policy — the money you hand over to the insurer in exchange for cover. It can be paid annually as a single amount or spread into monthly instalments over the year.
The premium buys you the promise that, if an event covered by the policy happens, the insurer will pay out or provide the service set out in your terms.
How a premium works
Insurers set your premium by estimating how likely you are to claim and how much a claim might cost. They use factors such as your age, address, claims history, the item insured and the level of cover you choose.
Paying monthly usually costs more than paying annually, because monthly payment is effectively a credit arrangement with interest added — the insurer must show you the annual price and the total monthly cost so you can compare.
How could this affect me?
A higher premium is not automatically worse value — a cheaper policy may carry a bigger excess, more exclusions or lower cover limits. It pays to compare what the premium actually buys, not just the headline price.
Choices you make can move the premium: a higher voluntary excess, added security, fewer optional extras or a bigger no claims discount can all reduce it, while modifications or a recent claim can push it up.
Things to watch out for
- Paying monthly usually costs more than paying yearly — check the interest rate and total cost.
- The cheapest premium can hide a high excess, low cover limits or extra exclusions.
- Add-ons bundled into the price (like breakdown or legal cover) may duplicate cover you already have.
- A low first-year premium can jump sharply at renewal.
Know your rights
- When paying by monthly instalments, the insurer must set out the annual price, the total payable and any interest so you can compare with paying annually.
- You have a cooling-off period of at least 14 days to cancel a new policy and get a refund of premium for the unused, unclaimed period (an admin fee may apply).
- If you believe you were mis-sold or overcharged, you can complain and escalate to the Financial Ombudsman Service.
General information, not personal advice
Consumer Credit is an independent information service. We do not provide regulated financial advice or sell financial products. For advice on your own situation, speak to an appropriately authorised firm or a free service such as MoneyHelper. About Consumer Credit.
Sources
We checked this page against these official and authoritative sources.
- MoneyHelper, How insurance premiums are calculated (opens in a new tab). Accessed 22 Aug 2026.
- FCA, General insurance pricing practices (PS21/5) (opens in a new tab). Accessed 22 Aug 2026.