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).
- RiskHeads; How to Calculate Earned Premium (Example); Adam Bishop; August 2010
- IRS. "Total Amount of Coverage." Accessed Oct. 26, 2020.
- Insurance Information Institute. "Choosing an Insurance Policy." Accessed Oct. 26, 2020.
- Insurance Information Institute. "Five Insurance Mistakes to Avoid (and Still Save Money)." Accessed Oct. 26, 2020.
Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.