Unearned premium
Unearned Premium
An unearned premium is a term used in the insurance industry to refer to the portion of a policyholder's premium that has been collected but not yet earned by the insurance company. This is because the policy period has not yet expired, and the insurance company is still obligated to provide coverage for the remaining policy period.
Overview[edit | edit source]
When an insurance policy is purchased, the policyholder pays a premium to the insurance company. This premium is considered income for the insurance company. However, the insurance company has not yet earned all of this income at the time of payment. The portion of the premium that has not yet been earned is referred to as the unearned premium.
The unearned premium is essentially a liability for the insurance company. This is because the insurance company is still obligated to provide coverage for the remaining policy period. If the policyholder were to cancel the policy before the end of the policy period, the insurance company would be required to refund the unearned premium.
Calculation[edit | edit source]
The calculation of the unearned premium is typically straightforward. It is usually calculated as the total premium paid by the policyholder, multiplied by the proportion of the policy period that has not yet elapsed. For example, if a policyholder pays a premium for a one-year policy and cancels the policy after six months, the unearned premium would be 50% of the total premium.
Accounting Treatment[edit | edit source]
In accounting, unearned premiums are treated as a liability on the insurance company's balance sheet. This is because the insurance company has an obligation to provide coverage for the remaining policy period or to refund the unearned premium if the policy is cancelled.
Regulatory Considerations[edit | edit source]
Insurance regulators often require insurance companies to maintain a certain level of reserves to cover their unearned premium liabilities. This is to ensure that insurance companies have sufficient funds to meet their obligations to policyholders.
See Also[edit | edit source]
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