Unearned Premium Definition

Unearned Premium in insurance refers to the portion of the premium paid by the policyholder for a policy period that has not yet expired. Insurance premiums are typically paid in advance for coverage that extends over a specific period, such as six months or a year. The unearned premium represents the portion of the premium that corresponds to the remaining coverage period.

For instance, if a policyholder pays an annual premium of $1,200 at the beginning of the policy term, after six months, $600 would be considered unearned because it covers the remaining six months of coverage. Unearned premiums are recorded as liabilities on an insurer’s balance sheet until they are earned through the passage of time or policy cancellation. This accounting practice ensures that insurers accurately reflect their financial obligations and liabilities related to the provision of insurance coverage.