Earned Premium
The portion of an insurance premium that corresponds to the period of coverage that has already passed. It represents the amount an insurance company has rightfully earned by providing coverage for a specific time period.
Example
“After six months of a 12-month policy, the insurance company had earned half of the annual premium as earned premium.”
Memory Tip
Think 'EARNED your time' - the insurer has earned the premium by providing coverage over time that has already passed.
Why It Matters
Understanding earned premium is crucial when canceling policies mid-term, as it determines how much of your premium you can get refunded. It also affects how insurance companies report their financial performance and maintain reserves.
Common Misconception
Many people think they should get a full premium refund when canceling a policy, not realizing that the insurance company keeps the earned premium for the coverage period already provided. The refund only applies to the unearned portion representing future coverage.
In Practice
Sarah pays a $1,200 annual auto insurance premium on January 1st. On July 1st, she cancels her policy to switch insurers. The insurance company has earned $600 (6 months ÷ 12 months × $1,200) as earned premium for coverage already provided. Sarah receives a $600 refund representing the unearned premium for the remaining 6 months of unused coverage.
Etymology
From the insurance accounting term 'earned,' meaning coverage time that has elapsed, combined with 'premium,' from Latin 'praemium' meaning reward or prize.
Common Misspellings
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See Also
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