What is the primary function of premiums in an insurance policy?

The primary function of premiums in an insurance policy is to maintain the active status of the policy. Premiums are the payments made by the policyholder to the insurance company, which in turn allows the policyholder to keep the coverage in effect. If premiums are not paid, the insurance policy may lapse or be terminated, and the coverage will no longer be in force, leaving the policyholder without the financial protection that the insurance provides. Therefore, paying the premium is essential for ensuring continuous protection under the policy terms.

The other functions mentioned, such as setting coverage limits, determining payout structures, and assessing risk profiles, are important aspects of the insurance process but are not the primary function of premiums themselves. Instead, those elements relate more to the terms of the policy and how the insurer manages risk and payouts, rather than the direct relationship between the premium and the policy's active status.