Unused Premiums in Term Insurance

Course: Insurance Planning
Lesson 12: Types of Life Insurance

Student Question:

Could you help clarify the term “unused premiums” as it relates to term life insurance?  I guess I don’t see how you could have a premium not used in term life.

Instructor Response:

Assume you pay $6,000 in annual prepaid premiums on Jan 1 2020 for coverage for the 12 months ending 12/31/2020.

You cancel the policy effective 5/31/2020.  The insurance company has earned premiums from 1/1/20 – 5/31/17.  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.