What is meant by earned premium?

Prepare for the Massachusetts Personal Lines Exam. Study with engaging flashcards and multiple-choice questions. Each question offers helpful hints and explanations. Get ready for success!

The concept of earned premium refers to the portion of the premium that corresponds to the coverage that has been provided during the policy term up to a specific point in time. When an insurance policy is in effect, premiums are typically paid in advance, but not all of that premium is immediately considered "earned." As time passes and the insurer provides coverage, the premium starts to become earned.

For instance, if you pay for a one-year policy, the insurer begins to earn that premium as the days go by and you remain covered. After a month, a fraction of the premium is now considered earned because the insurer has provided coverage for that month. This earned premium represents the risk that the insurer has assumed during the duration of the coverage.

The other options do not accurately define earned premium. Premium paid for a policy lacking coverage does not reflect any earned portion, as it implies no risk was accepted. Unpaid premium owed at policy renewal does not pertain to the premium that has already been "earned." Additionally, premiums refunded due to policy cancellation address a completely different situation where coverage is reduced or removed rather than reflecting what has been earned for the coverage already provided.

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