What Are Unexpired Premiums? Understanding Unexpired Premium
What Are Unexpired Premiums? Understanding Unexpired Premium
Unexpired premiums are the number of premiums that correspond to the remaining period on a schedule for the insurance policy. In other words, this is the portion of the policy’s premium that the insurance company has not “earned” because the policy has some time before it expires.
Unexpired premiums represent a liability on the insurer’s balance sheet because they are reimbursed once the policy is canceled.
For example, for a five-year insurance policy that is fully prepaid, the premium is 2,000 yuan per year. At the end of the first year, the insurance company has earned 2,000 yuan in premiums, and the unexpired premiums are 8,000 yuan.
KEY TAKEAWAYS
- Unexpired premiums are the portion of a policy’s premiums that an insurance company has not “earned” because the policy has a period before it expires.
- The terms in the insurance contract govern the terms of unexpired premiums.
- In some cases, insurance companies may not have to refund unexpired premiums.
Understanding Unexpired Premiums
Unexpired premiums are part of the total premium charged in advance by the insurance company. Unexpired premiums may be refunded if the customer terminates coverage before the end of the period covered by the premium. Unexpired premiums can be refunded when the coverage is declared a total loss and coverage is no longer required, or when coverage is canceled by the insurance provider.
For example, consider a customer whose auto insurance premiums are paid one year in advance and the vehicle is completely destroyed within four months of the coverage period. Insurance companies keep one-third of the annual premium for providing coverage, and the remaining two-thirds are refunded as unexpired premiums.
The terms in the insurance contract govern the terms of unexpired premiums. These regulations must comply with regulations relevant to the region in which the insurance is offered. A specific formula for calculating the number of outstanding premiums may be required.
This premium The policyholder pays for the insurance contract and the insurer does not immediately recognize it as income. In some cases, insurance companies may not have to refund unexpired premiums.
For example, if the applicant falsifies information on the application form, the applicant may not be required to refund any portion of the earned or unearned premiums collected. The policy usually outlines the conditions that must be met when applying for and collecting the unexpired portion of the premium.
If the policyholder terminates coverage without cause, or because another insurance company purchased a similar policy, etc., the insurance company may not have to refund some of the outstanding premiums. Policyholders should wait until the end of the coverage period for the last premium paid before switching insurers.
However, if the insured can demonstrate that the policy discounting agency has not complied with the terms and conditions stated in the policy terms, the unused portion of the premium shall be refunded.
Unexpired Premiums and Earned Premiums
Unexpired premiums on an insurance policy can be combined with earned premiums. Earned premiums are
pro-rata prepaid premiums that have been “earned” and now belong to the insurer. The amount of premiums earned is equal to the total premiums collected by the insurance company over some time;
In other words, earning premiums is part of the premium, paid for some time when the policy was in effect but has now expired. Since the insurance company covered the risk during this period, the associated premiums collected from the insured can now be considered “income”;
Example of Unexpired Premium
Because canceling a policy can mean a refund, outstanding premiums show up as a liability on an insurance company’s balance sheet.
For example, an insurance company received $600 on Jan. 27 for coverage between Feb. 1 and July 31, but as of Jan. 31, the $600 had not been received. The insurance company declares $600 in its cash account and $600 in its outstanding premium income account as a current liability. When the company earns premiums, the supplier transfers the amount earned from the liability account to the income account on the income statement.