An insured pays a full annual premium of $1,200 for a life policy and cancels after three months. The $300 portion covering the three months of protection already provided is known as the:
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Why A is correct
The earned premium is the portion of the premium that corresponds to the period of coverage already provided, here three months of the twelve-month policy, or $300. The unearned premium is the $900 remaining for the nine months of future coverage, which is ordinarily returned to the policyholder upon cancellation. The earned and unearned split matters for cancellation refunds, for the insurer's financial statements and unearned premium reserve, and for accounting when policies are replaced. Level and gross premium describe pricing structure, not the allocation of premium over the policy period.
Why the other options are wrong
- B) The unearned premium is the $900 for the remaining nine months not yet provided, which is the refundable portion rather than the $300 already earned.
- C) A level premium is a premium amount that stays constant over the policy term; it is not an allocation of the paid premium.
- D) Gross premium is the total premium paid by the insured including expenses and commissions; it does not describe the earned portion at cancellation.
Memory hook
Earned = coverage already used; unearned = coverage still ahead, and that is what gets refunded.