What is the primary purpose of premiums in group insurance plans?

The primary purpose of premiums in group insurance plans is to fund the benefits and cover administrative expenses. In group insurance, premiums are collected from the members of the group, and these funds are pooled together to pay for the financial protection provided to all participants in the plan. This includes the claims made by the insured individuals as well as the expenses associated with managing and administering the insurance policy.

By pooling resources through premiums, the insurer can effectively manage risk for the entire group, ensuring that sufficient funds are available to meet the collective needs of the participants. The coverage provided is typically more affordable on a per-member basis compared to individual insurance plans, as the risk is spread across a larger population. Therefore, the premiums serve a dual function: they not only finance the guaranteed benefits paid out upon claims but also help maintain the operational aspects of the insurance program, such as processing claims and providing customer service.