Unused Premium

Course: Investment Planning
Lesson 14: Evaluation Portfolio Performance

Student Question:

Could you please clarify for me what the unused premium would be in term life insurance?  I don’t quite understand how you could not use the premium.  Thanks.

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Instructor Response:

Certainly.  A lot of different terms in insurance, to be sure.

Assume you pay $6,000 in annual prepaid premiums on Jan 1 2019 for coverage for the 12 months ending 12/31/2019.

You cancel the policy effective 5/31/2019. The insurance company has earned premiums from 1/1/19 – 5/31/19.  They have not earned premiums for the remaining 7 months of the year. They owe you $3500 calculated as 7 months x $500 cost per month. 

Does that help to clarify?