Minimum Earned Premium

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What is a Minimum Earned Premium?

When shopping for insurance, you may have come across the term “minimum earned premium.” This term essentially refers to the minimum premium that your insurance company will take for any period of coverage. A key consideration is that this influences how much you might be refunded should you decide to cancel a policy early.

Why Do Minimum Earned Premiums Exist?

Your insurance company determines the necessary premium to provide coverage for a specified period of time. When you sign up for a new policy, your insurance company will measure the risks associated with that policy and determine what amount in premium needs to be paid in order for the company to accept the risk. This amount can vary depending on the type of insurance you purchase, your type of business, and many other factors influencing the associated risks.

Insurance companies will use the minimum earned premium to help ensure that, if you decide to cancel your policy either before or immediately after an incident, they won’t take a loss in providing that insurance to you. Should you choose to cancel your policy before the term period is over, the insurance company may refund a portion of the money if the total you’ve paid is above the minimum earned premium amount, or may not refund any if the minimum premium amount has not yet been reached.

For example, let’s say you purchase a General Liability policy with a $1,000 annual premium. Halfway through the year, the insurance company may only consider $500 of that premium payment “earned,” while the remaining $500 may be considered “unearned,” even if you’ve already paid the premium for the year. If the insurance policy had specified that $800 was the minimum earned premium, then you will only see $200 returned after you cancel the policy halfway through the term.

How Do Minimum Earned Premiums Affect My Business?

When you purchase an insurance policy, you should understand the cost and impact of canceling a policy. This is of particular importance for some industries, such as contractors, that regularly have contracts which require coverage but may not extend for the full term of a policy.

You should not be afraid to purchase policies that have minimum earned premiums. Most service-based businesses have policies in place that help ensure they do not take a loss on the service in case of early cancellation. Cable, internet, and phone companies, for example, will have early cancellation fees applied, while some other companies will limit the number of days you have before you cannot request to have your money back.

Nevertheless, minimum earned premiums should be considered before canceling a policy, as they will impact the finances for your business.

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