Prepaid Insurance Expense

What Does Prepaid Insurance Expense Mean?

A prepaid insurance expense refers to the premiums paid for insurance that are recorded as assets on the balance sheet at the time of payment because coverage has not yet begun. Once coverage starts, a portion of the prepaid amount is gradually recorded as an expense until the entire payment is used, at which point the asset is fully converted into an expense.

Insuranceopedia Explains Prepaid Insurance Expense

Insurance is essentially a prepaid expense because, once a policy is purchased, the service (or coverage) will be provided in the future. For example, a death benefit cannot be paid out while the policyholder is still alive, and risks cannot be covered until they actually occur. Therefore, in accounting, insurance payments are initially recorded as assets.

For instance, if a company pays $60,000 for commercial property insurance covering an entire year, $5,000 is transferred from assets to expenses each month once coverage begins. By the end of the year, all payments will have been fully recorded as expenses.