Unearned Premium Reserve

What Does Unearned Premium Reserve Mean?

An unearned premium reserve is an account where an insurance company holds advance insurance payments. These payments are considered liabilities in the company’s accounting records, as they may be refunded to clients if policies are canceled before the coverage period begins.

Insuranceopedia Explains Unearned Premium Reserve

If a person pays $1,000 to an insurance company in January to cover them from March to July, the amount is considered an unearned premium for January and February, as coverage has not yet started. If the person cancels the policy before coverage begins, the company must refund the payment. However, if coverage has already started, the policyholder may only receive a partial refund, reflecting the unused portion of the premium. For example, if the policyholder cancels the insurance in April, they will not receive a full refund since the coverage for March is already earned.

There are valid reasons why an insurance company might not refund the premium, such as providing false information in the application.