Net premiums and gross premiums are terms used to describe the income that an insurance company receives in exchange for the risks assumed under insurance contracts. The premiums are the amounts that policyholders pay for coverage of insurance to protect against financial loss. However, differences between gross premiums and net premiums.
Gross premiums are the amounts that an insurer expects to receive during the life of a policy term. This affects the amount that the insured pay for the coverage of the contract of insurance. For example, if a policyholder pays US $ 1,000 for an insurance policy of a car six months, gross premiums for the period is US $ 1,000.
Net premiums relate to income that an insurance company will receive for taking the risk under an insurance contract, less expenses associated with the provision of coverage under the policy. Insurance companies normally buy reinsurance, which pays claims above a certain dollar amount. This helps protect the insurance company paying for large and catastrophic losses. The amount paid by a reinsurance policy is deducted from the gross premiums.
Insurance policies paid under payment plans may also affect net premiums. In a payment plan, the insured does not pay for the duration of the complete policy at inception or renewal. Instead, the insured makes installment payments, usually monthly or bimonthly. Net premiums reflect the proportion of premiums that the insured has already paid and for which the insurance company has already secured coverage.
Gross premiums and net premiums are important for calculating taxes owed by the insurance company. The state insurance departments often impose taxes on income earned by insurance companies; however, tax laws may make concessions for the gross premium reduced by the expenses or unearned premiums. For example, the Pennsylvania Department of Revenue imposes tax on gross premiums written by insurance companies in Pennsylvania; however, the tax does not apply to the amounts deducted from reinsurance. It does not apply to gross premiums did not win because the insurance company or the insured canceled a policy before the expiration of the term of this.