Enter the total premium, the coverage period, and the date for which the unearned premium is needed into the calculator to determine the unearned premium.

Unearned Premium Calculator

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Unearned Premium Formula

The following equation is used to calculate the Unearned Premium.

UP = TP \times \frac{TRD}{TCD}
  • Where UP is the unearned premium ($)
  • TP is the total policy premium ($)
  • TRD is the time remaining in the coverage period (days)
  • TCD is the total coverage duration (days)

To calculate the unearned premium, multiply the total premium by the fraction of time remaining compared to the total coverage duration.

What is an Unearned Premium?

Definition:

Unearned premium is the portion of an insurance premium that has been paid but not yet used to provide coverage. It represents the amount of the premium that still applies to the remaining future coverage period.

How to Calculate Unearned Premium?

Example Problem:

The following example outlines the steps and information needed to calculate the Unearned Premium.

First, determine the total premium. In this example, the total premium is $1,200.

Next, determine the total coverage duration. This is a 365-day annual policy.

Assume 90 days of coverage have passed, so there are 275 days remaining.

Finally, calculate the unearned premium using the formula above:

UP = $1,200 × (275 / 365)

UP ≈ $904.11

FAQ

Why does unearned premium matter?

Unearned premium matters because it reflects the portion of premium that must remain available for refunds or coverage obligations if the policy is canceled before the end of its term. Insurers are required to keep enough in reserve to meet these potential refunds.

How does an insurer handle unearned premium if a policy is canceled mid-term?

If a policy is canceled before its normal expiration date, the insurer typically refunds the unearned portion of the premium. The exact refund method can vary depending on the policy and may involve a pro-rata or short-rate calculation.

Does the unearned premium always decrease evenly over time?

In many standard policies, the unearned premium is earned evenly over the coverage period. However, some insurance products, like certain commercial or specialty lines, might use a different basis for earning premiums, taking into account factors specific to the individual policy or industry.