Insurance companies collect premiums from policyholders in return for writing insurance policies. Individuals and businesses buy insurance to protect against various risks, such as disease, death, theft and accidents. The cost of an insurance policy is known as the premium. According to the Insurance Information Institute, the portion of the premium that applies to the expired part of the policy period is known as the earned premium. Insurance companies can only recognize earned premium as revenue for accounting purposes. The premiums are fully earned when the policy expires.
Get the start date of the insurance policy and the prepaid insurance premium amount. The information should be on your insurance policy document.
Find the expired portion of the insurance policy’s length of coverage. Subtract the start date from the current date and divide it by the policy period. For example, if a one-year auto insurance policy came into force on Jan. 1, then four months will have expired on May 1, which is about a third (4 / 12) of the policy length. You also can calculate the expired portion in days—365 days per year and 366 days per leap year—instead of months. Assuming a 365-day year, 121 days (31 + 28 + 31 + 30 + 1) will have expired on May 1, which is about a third (121 / 365) of the policy length.
Calculate the earned premium, which is equal to the expired portion multiplied by the prepaid premium. To conclude the example, if the prepaid premium was $500, the earned premium on May 1 is about $167 ($500 x 0.33).
