Unearned Premium
Unearned premium is a term used in accounting for insurance policies. It is the portion of premium paid for insurance coverage that is not yet earned by the insurer. Unearned premium is recorded as a liability on the insurer’s balance sheet.
Here is an example:
An insurance company receives payment for a policy on January 1, 2023, but the coverage begins on January 15, 2023. The company will record unearned premium for the portion of the premium that is not yet earned.
The unearned premium is calculated by multiplying the premium by the number of days that the coverage is not yet earned. In this example, the unearned premium would be calculated as follows:
Unearned premium = Premium * (Number of days coverage not yet earned) / Total number of days in policy term
Unearned premium is an important account because it helps to ensure that insurers are not able to collect premiums for coverage that they have not yet earned.
