Understanding Unearned Premiums in Insurance: A Comprehensive Guide

Unearned Premium refers to the amount of an insurance premium that is paid in advance. It has not been earned by the insurer until the period for the payment has been reached. For example, if an insured individual has a policy payment due on the 20th of the month, is current, and makes a payment for the following month on the 15th, the premium he or she just paid is considered unearned until 5 days later when the payment is due for the current month.

The insurer must keep track of all unearned premiums because if a person decides to cancel his or her policy the insurer is responsible for paying the money from unearned premium back to the the policy holder. Continuing with the same example, if the policy holder made his payment on the 15th for a premium due on the 20th, but decided to cancel his coverage on the 17th because he switched to another company; the insurance company he paid had not earned that payment yet, and therefore would owe him a refund equal to any payment he made. This is to keep insurance companies from keeping money paid to them in advance, unless the policy stays active past the period the payment covers.