Unearned Premium

What Are Unearned Premiums?

An unearned premium is the premium amount that compares to the time span staying on a insurance policy. At the end of the day, the portion of the policy premium has not yet been "earned" by the insurance company in light of the fact that the policy actually has some time before it lapses.

Unearned premiums show up as a liability on the insurer's balance sheet in light of the fact that they would be paid endless supply of the policy.

For instance, toward the finish of the primary year of a completely prepaid five-year insurance policy with insurance premiums of $2,000 each year, the insurer has earned a premium of $2,000 and has an unearned premium of $8,000.

Understanding Unearned Premiums

An unearned premium is the portion of an insurer's total premiums that is collected in advance by an insurance company. Unearned premiums might be subject to return on the off chance that a client closes coverage before the term covered by the premium is complete. An unearned premium might be returned when an insured thing is declared a total loss and coverage is not generally required, or when the insurance provider drops the coverage.

For instance, consider a client who paid a [auto insurance](/collision protection) premium one year in advance who encounters the complete destruction of his vehicle four months into the coverage period. The insurance company saves one-third of the annual premium for coverage gave and returns the other two-thirds as unearned premium.

Provisions in the insurance contract administer the terms for unearned premium. The provisions must follow regulations connected with the area where the coverage is offered. A specific formula for working out the amount of the unearned premium might be required.

The premium that a policyholder pays for an insurance contract isn't promptly recognized as earnings by the insurer. In certain conditions, an insurance company might not need to issue a refund for unearned premium.

For instance, assuming the policyholder has misrepresented data on the application for getting insurance coverage, the provider may not be required to refund any part of the earned or unearned premiums collected. Policies ordinarily frame the conditions that must be met while applying for and getting the unearned portion of a premium.

Insurance providers might not need to return a portion of unearned premium when a policyholder terminates the coverage for not a glaringly obvious explanation, or because of reasons, for example, protecting a comparable policy with an alternate provider. It is best for the policyholder to hold on until the coverage period of the last paid premium is close before switching insurance companies.

Be that as it may, in the event that the insured can demonstrate the provider didn't respect the terms and conditions depicted in the provisions of the policy, any unused portion of the premium ought to be refunded.

Unearned Premium versus Earned Premium

An unearned premium on an insurance policy can be diverged from earned premium. Earned premium is a favorable to evaluated amount of paid-in-advance premiums that has been "earned" and presently has a place with the insurer. The amount of the earned premium likens to the sum of the total premiums collected by an insurance company throughout some undefined time frame.

At the end of the day, the earned premium is the portion of an insurance premium that paid for a portion of time wherein the insurance policy was in effect, however has now passed and lapsed. Since the insurance company covered the risk during that time, it can now consider the associated premium payments it took from the insured as "earned."

Illustration of Unearned Premium

Since dropping a policy might mean giving a refund, unearned premiums show up as liabilities on an insurance company's balance sheet.

For instance, an insurance company gets $600 on January 27 for coverage from February 1 to July 31, yet as of January 31, the $600 has not been earned. The insurance company reports the $600 in its cash account and reports $600 as a current liability in its unearned premium revenue account. As the company procures the premium, the provider moves the amount earned from the liability account to a revenue account on its income statement.

Features

• Unearned premium is the portion of the policy premium that has not yet been "earned" by the insurance company in light of the fact that the policy actually has some time before it lapses.
• In certain conditions, an insurance company might not need to issue a refund for unearned premium.
• Provisions in the insurance contract administer the terms for unearned premium.