what are unearned premiums 
an unearned premium is the premium amount that corresponds to the time period remaining on an insurance policy in other words it is the portion of the policy premium that has not yet been earned by the insurance company because the policy still has some time before it expires unearned premiums appear as a liability on the insurer s balance sheet because they would be paid back upon cancellation of the policy for example at the end of the first year of a fully prepaid five year insurance policy with insurance premiums of 2 000 per year the insurer has earned a premium of 2 000 and has an unearned premium of 8 000 understanding unearned premiumsan unearned premium is the portion of an insurer s total premiums that is collected in advance by an insurance company unearned premiums may be subject to return if a client ends coverage before the term covered by the premium is complete an unearned premium may be returned when an insured item is declared a total loss and coverage is no longer required or when the insurance provider cancels the coverage for example consider a client who paid an auto insurance premium one year in advance who experiences the complete destruction of his vehicle four months into the coverage period the insurance company keeps one third of the annual premium for coverage provided and returns the other two thirds as unearned premium provisions in the insurance contract govern the terms for unearned premium the provisions must follow regulations related to the area where the coverage is offered a specific formula for calculating the amount of the unearned premium may be required the premium that a policyholder pays for an insurance contract is not immediately recognized as earnings by the insurer in certain circumstances an insurance company may not have to issue a refund for unearned premium for example if the policyholder has falsified information on the application for obtaining insurance coverage the provider may not be required to refund any part of the earned or unearned premiums collected policies typically outline the conditions that must be met when applying for and receiving the unearned portion of a premium insurance providers may not have to return a portion of unearned premium when a policyholder terminates the coverage for no given reason or for reasons such as securing a similar policy with a different provider it is best for the policyholder to wait until the coverage period of the last paid premium is close before switching insurance companies however if the insured can prove the provider did not honor the terms and conditions described in the provisions of the policy any unused portion of the premium should be refunded unearned premium vs earned premiuman unearned premium on an insurance policy can be contrasted with earned premium earned premium is a pro rated amount of paid in advance premiums that has been earned and now belongs to the insurer the amount of the earned premium equates to the sum of the total premiums collected by an insurance company over a period of time in other words the earned premium is the portion of an insurance premium that paid for a portion of time in which the insurance policy was in effect but has now passed and expired since the insurance company covered the risk during that time it can now consider the associated premium payments it took from the insured as earned example of unearned premiumbecause canceling a policy may mean issuing a refund unearned premiums appear as liabilities on an insurance company s balance sheet for example an insurance company receives 600 on january 27 for coverage from february 1 to july 31 but as of january 31 the 600 has not been earned the insurance company reports the 600 in its cash account and reports 600 as a current liability in its unearned premium revenue account as the company earns the premium the provider moves the amount earned from the liability account to a revenue account on its income statement 