Unearned Premium
The portion of the premium that corresponds to the period of coverage that has not yet elapsed. It must be returned if the policy is cancelled mid-term.
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Practice This Concept
An "unearned premium" is best defined as:
The portion of the premium covering the period of insurance protection that has not yet elapsed — The unearned premium is the portion of the premium corresponding to the future period of coverage not yet provided. It is a liability of the insurer — if the policy is cancelled, the unearned portion is returned to the insured. As time passes and coverage is provided, unearned premium converts to earned premium. Tracking unearned premium is central to accounting and to calculating cancellation refunds.
National insurance concept
In insurance accounting, the difference between earned and unearned premium is that:
Earned premium is the portion of premium corresponding to the expired policy period; unearned premium is the portion for the remaining period — Premium is earned as time passes because the insurer's exposure continues. On an annual policy, the earned premium grows month by month as the coverage period elapses, and the unearned premium is the portion still covering the future — which is returned pro rata if the policy is cancelled. Agents must understand this because returning unearned premium is a routine part of the cancellation process.
National insurance concept
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