Unearned Premium
Candlefocus EditorWhen a policy is issued by an insurance company, the insurer is obligated to offer a policy incepting after a certain date and expiring on a certain date (this date usually ranges between one to three years). The premium the insured pays to the insurer is calculated based on the length of the policy in order to ensure the insurance company receives adequate funds to provide coverage during the length of the policy. The portion of the premium charged for the portion of the policy that has yet to expire is considered an unearned premium for the insurer. Once the insured policy expires, the unearned premium will become an earned premium and any remaining balance can be refunded to the policyholder.
Under the provisions of the insurance contract, an insurance company may not have to issue a refund for unearned premium under certain circumstances. These circumstances may include if the insured cancels the policy or if the insurer cancels the policy for nonpayment. In this instance, the insurer may retain the unearned premium in full due to their contractual obligation to provide coverage to the policyholder.
In certain cases, the insurer may be able to make an adjustment to reduce the unearned premium depending on when the policyholder cancels the policy. If a policyholder cancels before the policy expiration date and within a certain grace period, the insurer can calculate the amount of unearned premium and make an adjustment on the policy premium with a partial premium credit.
It is important to be aware of unearned premium when managing a policy. It helps to determine the premium rate of a policy, the risk an insurer may be exposed to, and potential premium refunds. To ensure that policyholders are familiar with the unearned premium concept, further education and conversation should be discussed between insureds and insurers.