Premium Balance

Premium Balance

Investopedia / Zoe Hansen

What Is Premium Balance?

Premium balance is the amount of premium that is owed to an insurer for a policy but that 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.

Key Takeaways

  • Premium balance refers to the amount of insurance premiums that are owed to an insurer for a policy but that have not yet been paid by the policyholder.
  • The premium balance will decrease over time as the policyholder makes regular installment payments until the policy is paid in full, eliminating the premium balance.
  • For any unearned premium, policyholders may sometimes request a refund.
  • Insurance companies allow premiums to be paid in installments as that is usually easier for a policyholder and, therefore, makes purchasing insurance more attractive.
  • Policyholders may be charged installment fees or cancellation fees if they pay in installments, which makes the option attractive to insurance companies.
  • Insurance companies classify premiums as either unearned premiums or earned premiums.

Understanding 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. Policyholders can pay the premium balance in a variety of ways: cash, check, or credit card. Paying with credit card installments can be beneficial if the cardholder has a rewards or cashback card, earning benefits while making payments. In this way, you can reduce your premium by 2% or more, generally, or get airline miles or other perks, depending on what the card offers. 

In choosing an insurance policy, it generally pays to shop around, especially if you've 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. 

Even if canceling your current policy to go with a new one from a different insurer can result in an unwanted cost, the long-term benefit of switching might end up saving you money. Even more, if you tell your current insurer that you are leaving, they may entice you to stay by providing you with certain benefits or a reduced premium. It's always worth inquiring what the insurance company can do for you if you've been a customer for a long period of time.

Example of Premium Balance

John buys a new car and purchases auto insurance to protect himself in the event of a car accident or theft. He purchases his insurance policy from Insurance ABC. The policy costs $1,000 a year and John decides to make quarterly payments, which amounts to four payments a year of $250.

The year goes on and it is now the end of June. Two quarters have passed and John has made two payments of $250 each for his auto insurance, totaling $500. The amount left on his policy for the year is $500, which is his premium balance.