Addressing the Topic Unearned Premium

Suppose you get cheap car insurance with no deposit policy in the United States or any other place in the world. In that case, you could have the choice, or sometimes be required, to pay out premiums for the total time of coverage or for the extended part of the time of coverage.

Insurance providers do not see this money as “earned money” because it cannot be placed into their assets until the period of time for which the payment has been made has expired. Then, basically, an unearned premium is the payment you have made upfront, less the total amount of time that the premium has covered already.

Let’s See an Example of How an Unearned Premium Is Calculated

Say you have bought a one-year car insurance policy where the total premium owed to the insurer is $1200.00 for the whole year. At first, you were thinking about buying now pay later car insurance, but the insurer offered a small discount for paying the full premium in advance, and you have decided to accept it.

What happens then?

  • One day before your insurance policy kicks in, the unearned premium is $1200.00 because no money has yet been spent to pay for any kind of coverage; on the other hand, the earned premium is $0.00
  • Two months after your policy has been started, the unearned premium is $1000.00, and the earned premium is then $200.00.
  • When five months are left behind, the unearned premium has dropped to $700.00, and the earned premium has ascended to $500.00.
  • Then, after seven months, the unearned premium will be, of course, $500.00, and the earned premium will be $700.00.

I suppose you have got the idea…

Why Should You Be Familiar with Unearned Premium Definition?

Although not all insurance policies would allow it, you could find some others where the policyholder could be able to cancel his or her policy while it is still valid. Generally, the insured would assume then that the insurance provider will refund part of the unearned premium. The exact sum will be subject to the terms agreed in the insurance contract.

This process is commonly known as a pro-rated refund of premium, and it has its basis on the unearned premium calculation of any specific insurance policy.

How Much Would You Be Refunded?

We cannot tell how much money you would be refunded without a previous exam of your insurance policy contract because the terms of an unearned premium refund could vary from one insurance provider to another and even from policy to policy. When you have already studied your insurance contract, and yet, you don’t understand how a refund could apply, then you should contact your insurance company or your agent. They should be capable of explaining this process to you and calculating the exact sum of the refund.

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