Unearned Premium

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DEFINITION of 'Unearned Premium'

The premium corresponding to the time period remaining on an insurance policy. Unearned premiums are proportionate to the unexpired portion of the risk, for which coverage has been sought by the insured party. Thus, it is deemed to have not yet been earned, or "unearned," by the insurer. It appears as a liability on the insurer's balance sheet, as it would have to be paid back upon cancellation of the insurance policy.

BREAKING DOWN 'Unearned Premium'

For example, assume an insurer writes a five-year insurance policy that is fully prepaid by the insured party. Insurance premiums paid are $2,000 per year, for a total of $10,000 for the five-year period. At the end of the first year, the insurer would have earned a premium of $2,000 and would have an unearned premium of $8,000.

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