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Normally an insurance policy covers the risk for one year by default. But one can avail the coverage for less than a year, suppose for6 months or3 months, and even1 month. For that the premium will be charged will be less. For example,
Suppose premium for1 year = $100
Then premium for6 months should be =$50. (?)
No, it is not, because,
Insurance companies charge a percentage of the annualized premium to calculate the premium for the number of months you are taking for the policy. Suppose they charge70% for6 months,
So the premium for6 months will be =70% of $100 which is $70
This percentage is fix by the insurance company, and different percentages are there for the number of months you are taking the coverage. This process is known as Short Period Scale.
Insurance period is usualy year sometimes may be less than year according to the insured request in this case we apply short period rate and calculate premium proportionally.
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