Car insurance usually requires an upfront payment of the total premium for the entire period of insurance, but an insurance company can only claim a prorated part of the amount to be actually earned by them, which in insurance terms is called Earned Premium.
Earned premium is nothing but the actual amount of premium for the time that has elapsed out of the total length of the insurance policy without any claims made by the insured person. Earned premium is what insurance companies are absolutely entitled to as they have already provided services or risk coverage for that period and in the event of cancellation or termination of insurance, the insurance company holds on to the earned premium as it is not refundable.
For instance if a car insurance for one year attracts a total premium amount of $1,200 and six months past the start date, without any claim, a insurance company's earned premium will be $600. If we prorate or equally distribute the total premium amount of $1,200 over a year, it will cost $1,000 a month and so the number of months that have elapsed, in this case six months, will be part of the earned premium for an insurance company as is $600 in this example.
Earned premium naturally means that the insurance company did not have to pay claims to the policy holder for the elapsed time period since a payout on the policy would inevitably mean reducing the portion of the earned premium equal to the loss incurred by the policy holder and at times even resulting in loss for the insurance company as they might have to pay out more for the loss than the amount they have earned.
In the event of cancellation or termination of a policy before its actual completion date, the insurance company must refund the portion of the total premium for which the time has yet elapsed. However, the insurance company may charge a fee for processing within described limits, which is deducted out of the remaining amount that has to be paid back to the policy holder when the policy is terminated or canceled.
Earned premium is an important aspect that one needs to be aware of when dealing with insurance. Knowing what you are paying for and how much you are paying can help policy holders when dealing with their insurance companies. An upfront payment of the entire premium does not mean that the money belongs to the policy providing insurance company, unless they have provide equivalent service for the required time and have earned the amount only then they are entitled to the money in form of earned premium.