What Are Advance Premium Funds?

An advance premium fund exists when insurance companies who receive advance premiums must account for the unearned portion of these premiums as a separate liability item on their balance sheets. This item is commonly referred to as the advance premium fund or advance premium account.

Once the premium is earned, it is run through the income statement. Insurance companies often collect advance premiums in order to bind a policy's coverage during the underwriting process when an application for insurance is filed, along with a check for payment.

Key Takeaways

  • In the insurance business, an advance premium is an initial premium paid to bind an insurance policy for a given period of time.
  • An advance premium fund exists when insurance companies who receive advance premiums must account for the unearned portion of these premiums as a separate liability item on their balance sheets.
  • Once the premium is earned, it is run through the income statement.

Advance premium accounting rules are strictly regulated by the various states since it can be a large item for smaller companies and is a direct offset to capital. A common way to calculate unearned premiums is by prorating the premiums by the number of days within the period.

How an Advance Premium Fund Works

In the insurance business, an advance premium is an initial premium paid to bind an insurance policy for a given period of time. The most commonly known use of the term "advance premium," is with respect to fluctuating or variable insurance payments, such as payroll-based policies, where the actual amount due is not known until after the fact. An advance premium can also refer to pre-paid premiums, where the policyholder makes a premium payment before it is due.

Because the advance premiums paid to an insurer are not yet earned (insurance coverage has not yet been written yet to correspond with those premiums), those funds must be kept in a separate account from the company's operating funds, and cannot be counted as earned income until the insurance coverage has been written. In addition, the actual premium to be paid may differ from the estimated advance premium. This accounting item is commonly referred to as the advance premium fund or account. As the premium is earned, it is run through the income statement.

The advance premium fund differs from an insurance company's insurance premium trust, which is a separate account that serves to protect customers' premium funds from agency creditors or other claimants. Any premium payment deposited in an agency's trust bank account becomes a “fiduciary” fund subject to insurance code regulations.