What is a premium tax?

A premium tax refers specifically to a tax that is levied on the premiums collected by an insurance company from policyholders. This tax is typically imposed on the insured, meaning that when individuals or businesses pay their insurance premiums, a portion of that payment may be allocated to cover the premium tax.

This tax can vary based on state regulations and is often used to fund various state programs or insurance department operations. It’s important to differentiate premium tax from a fee or a surcharge since a premium tax is an outright tax on the total premium paid, rather than an additional fee for services or penalties for late payments.

Understanding this concept is important, especially in the context of surplus lines, as surplus lines insurance often deals with risks that standard insurers do not cover. Therefore, being aware of the financial implications, including the premium tax, is crucial for those involved in this sector.