Earned Premium

An earned premium in insurance terms is the amount of money the insurance company has collected that covers the portion of your insurance coverage that has already expired. This is calculated by using a simple ration between the expired coverage period and the total life of an insurance policy’s coverage.

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Rachel Bodine graduated from college with a BA in English. She has since worked as a Feature Writer in the insurance industry and gained a deep knowledge of state and countrywide insurance laws and rates. Her research and writing focus on helping readers understand their insurance coverage and how to find savings. Her expert advice on insurance has been featured on sites like PhotoEnforced, All...

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Leslie Kasperowicz holds a BA in Social Sciences from the University of Winnipeg. She spent several years as a Farmers Insurance CSR, gaining a solid understanding of insurance products including home, life, auto, and commercial and working directly with insurance customers to understand their needs. She has since used that knowledge in her more than ten years as a writer, largely in the insurance...

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Reviewed by Leslie Kasperowicz
Farmers CSR for 4 Years

UPDATED: Oct 30, 2020

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An earned premium in insurance terms is the amount of money the insurance company has collected that covers the portion of your insurance coverage that has already expired. This is calculated by using a simple ration between the expired coverage period and the total life of an insurance policy’s coverage.earned premium

Why is that important?

It’s important to an insurance company because the money that has been earned, is theirs and will not be refunded to a customer in the event that they should cancel or alter their insurance premiums.

It’s important to a customer because the earned premium is money that they have already paid that they cannot ask for a refund on or change the terms of their policy around which the earned premium has been paid.

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How do you calculate the earned premium?

It is a fairly simple matter to calculate the earned premium on a policy and a customer can work out their earned premium easily and conveniently using a calculator or even a pen and paper.

For example the earned premium of a basic insurance policy;

Imagine you have an insurance policy which runs for one year and to keep it simple, this policy begins on the 1st of January 2013 and expires on January 1st 2014. It’s not a leap year so there are exactly 365 days over which your policy has to run.

Your policy costs $12,000 at the start of the year which you pay for in one installment on December 31st 2012, so the insurer already has your money but on that day none of it can be classified as “earned premium” because the period of coverage doesn’t start until the next day.

Then let’s say on April 30th you decide you want to cancel your policy for one that better suits your needs and you want to know your earned premium and how much you might get back.

January has 31 days, February has 28 (at least in this example), March has 31 and it’s the 30th of April so that’s another 30 days. In total that’s 120 days of coverage that you’ve paid for.

So your earned premium is 120/365 x $12,000 which is $3,945.21 to the nearest cent. And that means you could expect a rebate of $12,000 minus $3,945.21 (and any fees deducted as part of your policy agreement for early cancellation) of around $8,054.79.

Additional Earned Premium Definitions

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