Earned Premium
The portion of an insurance premium that corresponds to the period of coverage that has already passed. It represents the money an insurance company has "earned" by providing coverage during that time period, as opposed to unearned premium which covers future periods.
Example
“After six months of a 12-month auto insurance policy, the insurance company had earned premium of $600 out of the total $1,200 annual premium.”
Memory Tip
Think 'EARNED = Already Served' - the insurance company has earned this money by already providing coverage during that time.
Why It Matters
Understanding earned premium is crucial when canceling policies or switching insurers, as it determines refunds and how much coverage you've actually paid for. It also affects how insurance companies report their finances and set aside reserves for claims.
Common Misconception
Many people think they lose their entire premium if they cancel mid-term, but insurance companies typically only keep the earned premium portion and refund the unearned portion. Some also confuse earned premium with the total premium paid upfront.
In Practice
Sarah pays $1,200 for a 12-month home insurance policy on January 1st. On July 1st (6 months later), she decides to cancel her policy. The insurance company has earned premium of $600 (6 months ÷ 12 months × $1,200) for coverage already provided. Sarah would receive a refund of $600 representing the unearned premium for the remaining 6 months, minus any cancellation fees.
Etymology
From the accounting principle that revenue is "earned" over time as services are provided, combined with "premium" from Latin "praemium" meaning reward or prize.
Common Misspellings
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See Also
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