Which of the following is the correct formula to calculate the unearned premium?

Question

Options

• AUnearned premium = (Policy premium x Unexpired coverage days) / Total number of days in the
• BUnearned premium = (Interest premium x expired coverage days) / Total number of days in the
• CUnearned premium = (Insurance contracts x Reserve coverage days) / Total number of days in the
• DUnearned premium = (Overhead premium x Unexpired coverage days) / Total number of days in

• A
  72% (23)
• B
  16% (5)
• C
  6% (2)
• D
  6% (2)

Explanation

Option A is correct because unearned premium represents the portion of a premium that has not yet been "earned" by the insurer - it covers the remaining, unexpired portion of the policy period. The formula logically divides the policy premium proportionally by the days of coverage not yet consumed.

Why the distractors fail:

• B uses "Interest premium" and "expired coverage days" - both wrong components; unearned premium uses the unexpired days, and there's no "interest premium" concept in this context.
• C substitutes nonsensical terms ("Insurance contracts" and "Reserve coverage days") that have no standard role in this calculation.
• D uses "Overhead premium," which is an internal cost concept, not the full policy premium used to calculate customer obligations.

Memory tip: Think of unearned premium as a refund calculation - if a policy were cancelled today, the insurer owes back the unexpired days' worth. So: Policy Premium × (Days Left / Total Days). "You haven't earned what hasn't happened yet."

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