Prepaid Insurance
What Is Prepaid Insurance?
The term prepaid insurance alludes to payments that are made by individuals and businesses to their insurers in advance for insurance services or coverage. Premiums are regularly paid a full year in advance, however at times, they might cover over 12 months. At the point when they aren't spent or expired, these payments appear on an insurance company's balance sheet. as a current asset.
How Prepaid Insurance Works
A prepaid expense is a use that a business or individual pays for before utilizing it. Prepaid insurance is viewed as a prepaid expense. At the point when somebody purchases prepaid insurance, the contract generally covers a period of time from now on. For example, numerous [auto insurance](/collision protection) companies operate under prepaid schedules, so insured parties pay their full premiums for a year period before the coverage really begins. A similar applies to numerous medical insurance companies — they favor being paid upfront before they start coverage.
A few insurers would rather that insured gatherings pay on a prepaid schedule like auto or medical insurance.
This is the way an insurance company accounts for prepaid insurance. As referenced over, the premiums or payment is kept in one accounting period, however the contract isn't in effect until a future period. A prepaid expense is carried on an insurance company's balance sheet as a current asset until it is consumed. That is on the grounds that most prepaid assets are consumed inside a couple of months of being recorded.
At the point when the insurance coverage becomes effective, it is moved from an asset and charged to the expense side of the company's balance sheet. Insurance coverage, however, is in many cases consumed more than several periods. In this case, the company's balance sheet might show relating charges recorded as expenses.
Except if a insurance claim is documented, prepaid insurance is typically renewable by the policyholder shortly before the expiry date based on similar conditions and conditions as the original insurance contract. Nonetheless, the premiums might be hardly higher to account for inflation and other operating factors.
Special Considerations
Prepaid insurance is normally viewed as a current asset, as it becomes changed over completely to cash or utilized inside a genuinely short time. Yet, on the off chance that a prepaid expense isn't consumed soon after payment, it turns into a long-term asset, which is definitely not an exceptionally common occurrence. The payment of the insurance expense is like money in the bank — as that money is spent, it is removed from the account in every month or accounting period.
Illustration of Prepaid Insurance
To show how prepaid insurance functions, we should expect that a company pays an insurance premium of $2,400 on November 20 for the half year period of December 1 through May 31. The payment is placed on November 20 with a debit of $2,400 to prepaid insurance and a credit of $2,400 to cash. As of November 30, none of the $2,400 has expired and the whole $2,400 will be reported as prepaid insurance. In any case, that changes once coverage starts.
On December 31, a changing passage will show a debit insurance expense for $400 — the amount that expired or one-6th of $2,400 — and will credit prepaid insurance for $400. This means that the debit balance in prepaid insurance on December 31 will be $2,000. This means five months of insurance that has not yet expired times $400 each month or five-sixths of the $2,400 insurance premium cost.
Features
- Insurance companies carry prepaid insurance as current assets on their balance sheets since it's not consumed.
- Prepaid insurance is payments made to insurers in advance for insurance coverage.
- At the point when the insurance coverage happen, it goes from an asset and is charged to the expense side.
- Policyholders can recharge coverage shortly before the expiry date based on similar conditions and conditions as the original insurance contract.
