Earned Premium
What Is Earned Premium?
Earned premium is the portion of an insurance premium that an insurance company has already earned by providing coverage during a specific period of time. As time passes and coverage remains active, the insurer gradually earns the premium.
The remaining portion of the premium that has not yet been earned is known as unearned premium.
Why It Matters
Earned premiums represent the revenue insurance companies receive for providing active coverage. Understanding earned premiums helps explain how insurers calculate refunds, cancellations, and policy accounting.
It also helps policyholders understand how premiums are applied over time.
How Earned Premium Works
When a policyholder pays a premium for a coverage period, the insurer does not earn the full amount immediately. Instead, the premium is earned gradually as coverage continues.
For example:
- if a policy lasts 12 months
- the insurer earns a portion of the premium each month
If the policy is canceled early, only the earned portion remains with the insurer.
Example
If a one-year insurance policy costs $1,200, the insurer may earn approximately $100 per month as coverage is provided.
Earned Premium vs Return Premium
- Earned premium is the portion the insurer keeps for coverage already provided.
- Return premium is the portion refunded to the policyholder if coverage ends early.
FAQs About Earned Premium
Why do insurers track earned premiums?
To account for revenue as coverage is provided.
What happens if a policy is canceled early?
The insurer keeps the earned premium and may refund the remaining amount.
Does earned premium affect claims?
No. Claims depend on coverage terms, not earned premium amounts.
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