An insurer cancels a one-year policy after six months and returns the premium for the remaining six months. The returned portion of the premium is called:
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Answer & full 3-part explanation (select an option above, or peek)
Why A is correct
The unearned premium is the portion of a paid premium that corresponds to the period of coverage still remaining — coverage the insurer has not yet provided. When a policy is cancelled mid-term, the insurer must return the unearned premium to the insured. The earned premium, by contrast, is the portion that has been used up to pay for the coverage already provided. The distinction is essential for accounting and for cancellation refunds, and unearned premiums are also treated as liabilities of the insurer in solvency and conservations proceedings.
Why the other options are wrong
- B) The earned premium is the portion that compensates the insurer for the six months of coverage already provided; the money returned for the remaining six months is the unearned portion.
- C) Gross premium is the total premium charged before deductions such as commissions and loading; it does not describe the refundable unused portion.
- D) Net premium is the premium left after expense loadings are removed; it describes how the premium is composed, not the refundable unused portion.
Memory hook
Unearned = coverage not yet delivered; earned = coverage already used. Cancel early, and the unearned comes back.