In insurance, unearned and earned premiums refer to the portion of the premium that has not yet been used to cover the risk and the portion that has been used, respectively. Here's a definition and example of each:
- Unearned premium: This is the portion of the premium that the insurer has received but has not yet earned because the coverage period has not yet ended. If the policyholder cancels the policy mid-term, the unearned premium will be returned to the policyholder. For example, if a policyholder pays $1,200 for an annual insurance policy but cancels the policy after six months, the unearned premium would be $600.
- Earned premium: This is the portion of the premium that the insurer has earned because the coverage period has passed. If the policyholder cancels the policy mid-term, the earned premium will be kept by the insurer. For example, if a policyholder pays $1,200 for an annual insurance policy and cancels the policy after six months, the earned premium would be $600.
The unearned and earned premium are important for insurers to track to ensure they have enough funds to cover potential claims and expenses.
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