When you purchase insurance coverage paid with an annual premium, your protection is in force for the next 12 months. The insurance company is, however, accepting payment for coverage it has not yet earned. If you cancel your policy, you would receive this unused portion of your premium back. From a balance sheet perspective, unearned premium revenue is, at the time of payment, both a cash asset and a current liability. As the coverage period progresses, the unearned premium amount reduces until, at the end of the policy, all premiums are earned.
Collect the information needed to perform the calculations. You will need the amount of the premium, the length of the policy and the periods of unearned premiums remaining. For an example, use a $1,200 premium over a 12-month term, with five months remaining on the policy.
Divide the premium by the total number of periods in the term. Using the example, the $1,200 premium is divided by 12, giving a monthly amount of $100.
Multiply the monthly amount by the periods remaining in the policy. In this example, $100 is multiplied by the five months remaining, for an unearned premium amount of $500.
Tips & Warnings
- In double-entry accounting, both the cash account and the liability in the unearned premium account reduce by the same amount each period. Using the example, both accounts would reduce by $100 monthly.
- If you are calculating unearned premiums in anticipation of cancelling insurance coverage, check your policy for any administrative fees or penalties added for early cancellation that may reduce your refund amount.
- Photo Credit rgbdigital/iStock/Getty Images
How to Calculate Earned Premium
Calculate the earned premium, which is equal to the expired portion multiplied by the prepaid premium. ... How to Calculate Unearned Premium.
What Is an Unearned Life Insurance Premium?
How to Calculate Unearned Premium; What Is a Waiver of Premium for Life Insurance? What Are Banded Premium Life Insurance Rates? Comments...
How to Convert Statutory Accounting Principles to GAAP
State regulators require insurers to report and pay state taxes on a portion of their unearned income (premium ... these reserves for...
Definition of Written Premium in Insurance
In most cases, the unearned premium has been paid for, but has not yet been used. Policy Cancellation. If the policyholder cancels...
How to Calculate Insurance Premiums
How to Calculate Unearned Premium. How to Compute Insurance Premium Taxes. How to Calculate a Deductible for Car Insurance. How Do I...
What Is an Unearned Income Tax Return?
Under Internal Revenue Service (IRS) tax law, unearned income and earned income are two distinctly different types of income. Based upon this...
Net Vs. Gross Premium Insurance
Net premiums earned reflect the portion of the ... tax laws may make allowances for gross premium reduced by expenses or unearned...
How to Calculate Call Premium
How to Calculate Unearned Premium. How to Calculate Earned Premium. How to Convert Bond Price to Yield. How Do Insurance Companies Establish...
Can a Cash Value on a Life Insurance Policy Affect My SSI?
All other unearned income calculations apply at 100 ... for a burial reserve. ... that provides basic death benefit protection in exchange...
How Do I Find My Premium Rate?
How to Calculate Unearned Premium; Does It Make Sense to Pay Auto Insurance in Installments? How to Merge Health Insurance With Dental...