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Unearned premiums are portions of premiums collected by insurance companies in advance, but are subject to return to the client if the coverage ends before the term covered by the premium is complete. An unearned premium may be returned when an insured item is declared a total loss, and coverage on that item is no longer necessary. The unearned premium may also be returned if the insurance provider chooses to cancel the coverage for some reason.
One example involves the refund of an unearned premium related to an auto insurance policy. If the client has paid the premium for a year in advance, then experiences a total destruction of the vehicle four months into that period, there is a good chance that the insurance provider will return two-thirds of that prepaid premium. The provider only keeps that portion of the annual premium for which coverage was actually provided.
However, it is important to note that the provisions found in the insurance contract govern the terms related to the return of an unearned premium. Those provisions must be in harmony with regulations and laws currently in force in the area where the coverage is offered. Depending on the content of laws that apply within a given country or state, a specific formula for calculating the amount of the unearned insurance premium may be required.
In some cases, an insurance carrier may not be required to issue an unearned premium refund. For example, if the policyholder falsified information in order to obtain the insurance coverage, the provider may not be required to refund any portion of collected premiums, even if they are technically unearned. Most policies will outline the conditions that must be met in order to apply for and receive the unearned portion of any premium already remitted to the insurance provider.
Insurance companies are highly unlikely to return any portion of an unearned premium if the policyholder chooses to terminate the coverage for no apparent reason, or for reasons such as a desire to secure a similar policy with a different insurance provider. For this reason, many people choose to wait until the period of time covered by the last paid premium is drawing near before switching companies for auto, health, and other forms of insurance coverage. However, if the insured party can prove that the provider failed to honor the terms and conditions found in the provisions of the policy, there is a good chance that any unused portion of the premium will be refunded.
I always try to pay off my auto insurance's gross premium (which for six months at a time) because it is actually a bit cheaper than paying month by month.
Because I do this it is good to know about unearned premium returns. Hopefully I will not have to experience this by my car becoming a total loss, but I will know that unearned premium rebate might be in my future depending on the time it happens so that will be nice!