Unearned premium is the premium corresponding to the time period remaining on an insurance policy. These are proportionate to the unexpired portion of the insurance and appear as a liability on the insurer’s balance sheet since they would be paid back upon cancellation of the policy. This way, 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.
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