The minimum earned premium, sometimes referred to as minimum retained premium, is the smallest amount of money an insurance company is willing to accept for writing a business insurance policy.
What is a minimum earned premium?
The minimum earned premium comes into play mainly when a business owner decides to cancel a policy before its expiration date.
For example, say you have a $500 premium on a one-year policy, and at the six-month mark, you decide to cancel coverage.
If the insurance company has no minimum earned premium in place, it would refund you the remaining premium. In this case, that would be $250, half of the $500 premium. But if the company has a minimum earned premium of $300, the most it would refund you is $200, regardless of how early into the policy’s term you canceled it.
Why do insurance companies use minimum earned premiums?
For insurance companies, minimum earned premiums are a way to manage risk and prevent customers from buying an insurance policy with the intention of canceling it after a single event or project. With a minimum earned premium in place, insurance providers have a much more reliable revenue stream and can therefore offer coverage when their customers need it.
Minimum earned premiums are not unique to the insurance industry. Many service providers require a down payment on long-term services or projects, or charge a cancellation fee for appointments canceled within a certain time frame. Insurance companies just use a different name.
How do minimum earned premiums affect your business insurance?
Here are a few key points business owners should know about minimum earned premiums:
Minimum earned premiums only matter when you cancel coverage. So long as you don’t cancel your insurance policy before its expiration date, minimum earned premiums won’t impact you.
Not all insurance policies come with a minimum earned premium. Some are pro-rated so that refunds after cancellation are calculated by dividing the total cost of the policy by the amount of time remaining when it is canceled.
Some policy fees are never refundable. Regardless of minimum earned premium practices, the taxes and fees you pay on your insurance policy are never refundable.
Some policies have a minimum earned premium of 100%. A 100% minimum earned premium is the entire yearly cost of your policy. This is more common in errors and omissions policies, which tend to have expensive claims and require larger payouts from insurance providers.
For help understanding your coverage, contact your Insureon agent. Our insurance specialists are licensed in every state and can help you understand what your policy covers and whether it has a minimum earned premium.
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