An annual life insurance policy is cancelled after three months. The portion of the premium covering the remaining nine months is called:
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Answer & full 3-part explanation (select an option above, or peek)
Why C is correct
Premium is earned as time passes and coverage is provided. After three months of an annual policy, the earned premium covers the three months during which the policy was in force, and the unearned premium covers the remaining nine months during which coverage will no longer be provided. The unearned premium is generally returned to the policyowner as a refund upon cancellation, subject to the policy's terms and any surrender charges. Gross premium is the total amount charged for the policy, and loading is the expense and profit component built into the premium, neither of which describes the refundable portion.
Why the other options are wrong
- B) Earned premium is the portion of the premium that covers the period during which coverage was actually provided, namely the three months, not the remaining nine months. The correct answer follows from the controlling authority, which this option does not follow.
- D) Gross premium is the total premium charged for the policy, including all components. It is not the label for the refundable portion covering the unexpired period. This common misconception is exactly what the governing rule rejects, so the option is incorrect.
- A) Loading is the expense, contingency, and profit component built into the premium. It is not the refundable portion of the premium for the unexpired term. This contradicts the governing rule explained above and therefore cannot be the correct answer.
Memory hook
Earned = time that has passed; unearned = time still ahead. Cancel early, and the future portion comes back.