Unearned Premiums

What is Unearned premium’

Unearned premiums-this is the premium corresponding to the time period remaining on an insurance policy. It is in proportion to the unexpired part of the insurance and is presented as liabilities in the balance sheet of the insurer, they must be returned upon rejection of the policy.

For example, at the end of the first year with full payment of the five-year policy with insurance premium in the amount of $ 2,000 per year, the insurer received an award of $2000 and has the provision for unearned premiums in the amount of $8,000.

Breaking down the ‘Unearned premium’

Unearned premiums are the portion of the premiums collected in advance, insurance companies, and are refundable if the customer terminates the coverage until the expiration of a premium class is completed. In unearned premiums may be returned when an insured item is declared a total loss and coverage is no longer required or when the insurer cancels coverage. Consider, for example, a customer who paid one year insurance premium in advance who is experiencing the complete destruction of his ship for four months during the period of insurance. The insurance company holds one-third of the annual fee for the coverage and returns the remaining two-thirds as unearned premiums.

The provisions in the insurance agreement specifies the conditions for unearned premium. Provisions must comply with the rules pertaining to the area where coverage is offered. A specific formula for the calculation of unearned premium may be required.

The reasons are not refund Unearned premiums

In certain circumstances, the insurance company cannot issue a refund for unearned premium. For example, if the policyholder falsified information on the application for insurance coverage, the supplier may be required to reimburse any portion of earned or unearned premiums. Policies usually define the conditions that must be met when submitting and receiving the unearned portion of the award.

The insurance company can not return the portion of unearned premium if the policyholder terminates the broadcast without explanation or for reasons such as providing a similar policy with another provider. It is best for the insured to wait until the period of the last paid premium close before switching insurance companies. However, if the policyholder can prove that the Supplier does not comply with the terms specified in the provisions of the policy, any unused portion of the award must be returned.

Unearned premiums and the balance

Because the cancellation policy may mean application to refund unearned premiums appear as liabilities in the balance sheet of the insurance company. For example, the insurance company receives $600 on 27 January for coverage from February 1 to July 31, but as of January 31 $600 not earned. The insurance company reported $600 in its cash accounts and records, $600 as current liabilities in its unearned revenue account premiums. As the company earns premiums and services amount received from the liability account to the account of the company on their income.

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