Reviewed by Aug 27, 2020| Updated on
Unearned premium is defined as the premium related to the remaining period of the insurance policy. This expense appears as a liability in the insurer's balance sheet since this sum must be paid back to the insured upon cancellation of the policy.
What is Unearned Premium
Unearned premiums are parts of the insurance premiums that are collected in advance by the insurers. The insurer is subject to refund the unearned premium if the insured decides to terminate the policy before the policy period ends. The unearned premium is to be returned when the insured item is lost, and the coverage for the item is no longer required or when the insurer cancels the coverage.
Consider the example where the insurance company has received an annual premium of Rs.5,000 at the end of the first year for a five-year insurance policy for a motor vehicle. Here, the company has earned a premium of Rs.5,000 and an unearned premium of Rs.20,000.
Highlights of Unearned Premium
It is advised for the policyholders to wait until the coverage period of the last paid premium is close to complete before switching to a different insurance company.
If the insured has the necessary proofs to show that the insurer did not stand by the terms and conditions in the policy underwriting, any unused premium should be refunded.