DEFINITION of Premium Balance
Premium balance is the amount of premium that is owed to an insurer for a policy, but which has not yet been paid by the policyholder. The premium balance will decrease in value over the course of the policy term as the policyholder makes installment payments. Policyholders may sometimes request a refund of any unearned premium.
BREAKING DOWN Premium Balance
Many insurers allow policyholders to pay for their policies in installments. Paying the full value of a policy’s premium can be a challenge on your budget to do all at once, and offering different payment structures allows insurers to reach a broader market. This type of policy feature is most often seen in auto insurance, which may offer monthly, quarterly, semi-annual, and annual installments.
Insurers allow policyholders to pay premiums over an extended period of time because they can extract an installment fee for the privilege. For example, an auto insurance company may allow the premium balance to be paid monthly, but will add a small fee to the monthly premium due. Additionally, the insurer may charge a cancelation fee if the policy is canceled before the policy term has come to a close. This fee, called the short rate, is typically a percentage of the remaining policy premium.
Insurers account for premiums in different ways depending on whether the premium has been collected, whether it is considered “earned” on the basis of time passing without a claim, and how much of the premium was paid in advance. Unearned premiums are considered a liability on the balance sheet until enough time has passed between premium collection and claims not being made against the policy. If the insurer’s business increases from year to year, earned premiums will likely be less than written premiums. This is because the premiums are considered fully paid when they are underwritten, and the balance – the unearned premium - represents the premium attributed to the unexpired part of the policy.
Tips for Policyholders
Reducing that balance due takes some planning. One way is to pay by credit card installments, using a card that offers cash back. In this way you can reduce your premium by up to 2% or get airline miles or other perks.
It pays to shop around, especially if your been with the same company for many years. Many online sites will compare numerous policies and give you price quotes. Finally, look to see if you're paying for insurance features you don't need. Perhaps towing coverage is on your auto policy and you have AAA, or maybe your deductibles are too low.