Insurance policies can range from a few pages to more than 100 pages in length and include a number of provisions and terms that a policyholder must read through thoroughly in order to understand. One of those terms is “unit of insurance.” Insurance companies calculate their rates and premiums based on the applicable unit of insurance. A unit of insurance has subtle differences in its definition based on the type of insurance the unit refers to.
TL;DR (Too Long; Didn't Read)
A unit of insurance represents a fixed monetary value of insurance coverage. In a life insurance policy, a unit of insurance is equal to $1,000 worth of coverage.
Exploring Premium Calculations
In exchange for the amount an insured person pays in premiums, the insurance company takes over the majority of the risk for the insured asset including property, life and health. Insurance companies incorporate expenses, reasonable profits and risk adjustments for loss expectations.
They apply these rates as costs per unit of insurance which also reflect state regulatory charges and limits. Insurance companies calculate the cost of insurance by multiplying the premium per unit of insurance by the number of units a policyholder purchased.
Pricing Life Insurance Policies
Life insurance policies are priced based on each unit of life insurance coverage, typically defined as $1,000 of standard term or whole life coverage. Insurance companies base units on risk factors including gender and age and on the various provisions required by the department of insurance for different states. A unit of insurance also relates to the benefit amount a policyholder purchases.
Evaluating Property Insurance
In hazard, property and business interruption insurance, a unit of insurance refers to the item that has coverage. This includes an in-progress construction structure, a building or business income over a specified period of time. Policies often use the "unit of insurance" term when delineating deductible amounts per occurrence or per insured item.
This typically occurs when a policy places different conditions on different types of items. For example, the policy may provide one level of replacement coverage for property and another for business income.
Understanding Liability Insurance
For liability, insurance companies set rates as the price per unit of insurance for each unit exposed to liability. Insurance defines properties or liabilities with similar characteristics as an exposure unit. Similar to life insurance, a unit of insurance in liability equals $1,000 of standard liability coverage. Therefore, someone with $300,000 in liability coverage would have 300 units of $1,000 in coverage.
Health Insurance Rates
As with liability and life insurance, insurance companies define a unit of insurance for health coverage as $1,000 in coverage. Health insurance rates reflect the levels of historical losses that the health insurance provider has experienced with a particular group, often a large company or a pool of smaller companies.
Tiffany C. Wright has been writing since 2007. She is a business owner, interim CEO and author of "Solving the Capital Equation: Financing Solutions for Small Businesses." Wright has helped companies obtain more than $31 million in financing. She holds a master's degree in finance and entrepreneurial management from the Wharton School of the University of Pennsylvania.