Premium

Understanding Premium in Real Estate

In real estate, the term “premium” encapsulates several key concepts:

Insurance Premium: The cost one must pay for an insurance policy. This could be paid annually, semi-annually, or monthly depending on the terms of the policy.
- Example: Annual or monthly premiums are generally required for hazard insurance, liability insurance, and life insurance.
Excess Value of a Mortgage or Bond: The value of a mortgage or bond in excess of its face amount, especially when the contractual interest rate is higher than the prevailing market rate.
- Example: When the face rate of a mortgage exceeds the prevailing market interest rate, the mortgage may be worth a premium over its face value.
Market Value Premium: An amount over the property’s market value paid due to some exceptional quality or feature.
- Example: Pembleton paid a premium for the house with an excellent view of the lake.

Frequently Asked Questions (FAQs)

Q: What factors influence the amount of an insurance premium?

A: Many factors can influence an insurance premium, including the coverage amount, the type of insurance, the property’s value, the location of the property, and the insured’s claim history.

Q: Why would someone pay a premium over the market value of a property?

A: Buyers pay a premium over market value for desirable attributes such as unique locations, excellent views, exceptional structures, or scarce local inventory.

Q: How often are premiums for title insurance paid?

A: Title insurance premiums are typically paid only once at the settlement of the real estate transaction.

Q: Can premiums be considered tax-deductible?

A: Premiums paid for investment properties can potentially be tax-deductible as they are considered a business expense.

Insurance Policy: A contract between an insurer and insured in which the insurer indemnifies the insured against specific losses.
Face Amount: The nominal value or dollar value of a security stated by the issuer.
Market Interest Rate: The prevailing rate of interest available on investments with similar risk and duration.
Title Insurance: A form of indemnity insurance predominantly found in the United States that insures against financial loss from defects in title to real property.
Hazard Insurance: Covers damage caused by fire, theft, and other hazards.
Liability Insurance: Protects against claims resulting from injuries and damage to people and/or property.

Online Resources

Suggested Books for Further Studies

Real Estate Finance & Investments by William Brueggeman and Jeffrey Fisher
Real Estate Investments and Financial Analysis by David M. Geltner
The Real Estate Investor’s Handbook by Alan F. Stevens
Principles of Real Estate Practice by Stephen Mettling and David Cusic

Real Estate Basics: Premium Fundamentals Quiz

### What is a common way that insurance premiums can be paid? - [x] Annually or monthly - [ ] Quarterly only - [ ] Daily - [ ] Upon claim submission > **Explanation:** Insurance premiums for various policies are typically paid annually or monthly, depending on the policy's terms. ### Why might a mortgage be worth a premium over its face value? - [x] Because its face rate exceeds the prevailing market interest rate - [ ] The mortgage has no tangible benefits - [ ] The mortgage has a longer duration - [ ] Due to lower face rate > **Explanation:** A mortgage might be worth a premium over its face value when its interest rate is higher than the current market interest rate, making it more valuable. ### How often are premiums for title insurance typically paid? - [x] Only once - [ ] Annually - [ ] Monthly - [ ] Every six months > **Explanation:** Title insurance premiums are usually paid once at the settlement of the real estate transaction, covering the title's history and ensuring its integrity. ### Which type of feature might lead a buyer to pay a premium over market value? - [x] An excellent view or unique feature - [ ] Average location - [ ] Regular maintenance - [ ] Basic interior design > **Explanation:** Buyers may pay a premium over market value for properties with exceptional features like a unique location, breathtaking view, or an exceptional structure. ### What role does an insurance premium play in hazard insurance? - [x] It is the cost needed to maintain the policy - [ ] It is deducted from compensation claims - [ ] It determines the amount of coverage - [ ] It is paid by insurers > **Explanation:** The insurance premium is the amount the policyholder pays to maintain hazard insurance coverage for protection against potential damages. ### What type of insurance generally requires annual or monthly premiums? - [x] Hazard insurances and liability insurance - [ ] Deposit insurance only - [ ] Reinsurance policies exclusively - [ ] Flood Insurance alone > **Explanation:** Hazard insurance and liability insurance typically have annual or monthly premium payments as per the policy agreements. ### Is it common for property insurance premiums to be higher in areas prone to natural disasters? - [x] Yes, they are higher due to increased risk - [ ] No, they remain the same regardless of location - [ ] Premiums are independent of disaster risks - [ ] Only liability insurance is impacted > **Explanation:** Areas prone to natural disasters often have higher insurance premiums due to the increased risk of damage or loss. ### For what purposes can investment property insurance premiums be deducted? - [x] As business expenses - [ ] Personal travel expenses - [ ] Gym memberships - [ ] Childcare expenses > **Explanation:** Premiums for insurance on investment properties can be considered business expenses and might be tax-deductible. ### Which term refers to the nominal dollar value of a security stated by the issuer? - [x] Face Amount - [ ] Market Value - [ ] Depreciation Cost - [ ] Premium Value > **Explanation:** The face amount refers to the nominal dollar value of a financial security like a bond or mortgage stated by the issuing entity. ### Why might liability insurance premiums be necessary for real estate investors? - [x] To protect against claims resulting from injuries or property damage - [ ] To increase property resale value - [ ] To enhance curb appeal - [ ] To ensure high rental income > **Explanation:** Liability insurance premiums are necessary to protect real estate investors from potential legal claims due to injuries or damage occurring on their property.