One of the most common questions we receive from customers goes something like this:
I just let my policy cancel- why am I getting a bill?
Then we ask “Did you actually cancel the policy? Or did you just not pay the bill?” When we confirm that the customer didn’t pay the premium due and let it cancel for NON-PAYMENT, then we can assume the answer to the question is “because you owe for earned premium.”
If you’re not in the insurance business, earned premium is a tough concept to understand. But it’s our hope that this article will help you understand it better. If nothing else, it could save you a lot of headache. Because no one wants to get a bill for something you didn’t want in the first place. Let’s start with a quick definition of earned premium…..
Definition of earned premium
There are several very technical definitions out there, but here’s mine: earned premium is simply the money due on the policy from the original due date until the cancellation date. State laws, as well as insurance company guidelines, dictate the amount of time allowed until the official cancellation, so it could vary from state to state. But it’s still a set period of time. Read on for an example.
How earned premium works
Monthly premium due on January 1 is $100.00.
Customer doesn’t pay by the due date (for whatever reason) and the policy finally cancels on February 1.
Customer will receive a bill for the premium from January 1 to February 1.
Technically, insurance was in force that entire month- the cancellation didn’t occur on January 1 right? It occurred on February 1. And if a covered claim occurred, then the claim would have been paid.
So, the insurance company has the right to collect premium for that time because it was earned by being in force. In other words, it’s owed.
How to avoid getting billed for earned premium (AKA How to cancel your insurance policy the right way)
Whether by phone call, written documentation or whatever method your current insurance company requires, the BEST way to cancel a policy is via YOUR request. Coverage will end the day you request, so there is no possibility for an earned premium situation.
It’s never in your best interest to let the policy cancel for non-payment. And here’s a tip: if the agent or insurance company that you’re switching to tells you otherwise, RUN. This exact situation will be yours. And you’ll be very unhappy. Because you’ll continue to get invoiced for that premium and if not paid, it will eventually go to a collection agency. And that’s NO fun. Just make a clean break of it, and save yourself a lot of trouble.