What is unearned premium?

Unearned premium refers to the portion of an insurance premium that has been paid in advance but has not yet been earned by the insurance company. This situation arises because insurance coverage is provided over a period of time, and the insurer must recognize income progressively as the coverage is delivered. If an individual has paid for a year of coverage but has only used a few months of it, the remainder of the premium represents unearned premium until the policy period has fully elapsed.

As time progresses and the insurance coverage is utilized, the insurance company gradually "earns" the premium, converting it from unearned to earned premium. Therefore, the correct identification of unearned premium focuses on the portion of advance premium that is still held by the insurer because it has not yet been applied to the coverage period.