Advance Premium Fund
An advance premium fund exists when insurance companies who receive advance premiums must account for the unearned portion of these premiums as a separate liability item on their balance sheets. The advance premium fund differs from a company's insurance premium trust, which is a separate account that serves to protect customers' premium funds from agency creditors or other claimants. An advance premium fund exists when insurance companies who receive advance premiums must account for the unearned portion of these premiums as a separate liability item on their balance sheets. An advance premium fund exists when insurance companies who receive advance premiums must account for the unearned portion of these premiums as a separate liability item on their balance sheets. Because the advance premiums paid to an insurer are not yet earned (insurance coverage has not yet been written to correspond with those premiums), those funds must be kept in a separate account from the company's operating funds, and cannot be counted as earned income until the insurance coverage has been written.
What Is an Advance Premium Fund?
An advance premium fund exists when insurance companies who receive advance premiums must account for the unearned portion of these premiums as a separate liability item on their balance sheets. This item is commonly referred to as the advance premium fund or advance premium account.
Once the premium is earned, it is run through the income statement. Insurance companies often collect advance premiums in order to bind a policy's coverage during the underwriting process when an insurance application is filed, along with a check for payment.
Advance premium accounting rules are strictly regulated by the various states since it can be a large item for smaller companies and is a direct offset to capital. A common way to calculate unearned premiums is by prorating the premiums by the number of days within the period.
How an Advance Premium Fund Works
In the insurance business, an advance premium is an initial premium paid to bind an insurance policy for a given period of time. The most commonly known use of the term "advance premium," is concerning fluctuating or variable insurance payments, such as payroll-based policies, where the actual amount due is not known until after the fact. An advance premium can also refer to pre-paid premiums, where the policyholder makes a premium payment before it is due.
Because the advance premiums paid to an insurer are not yet earned (insurance coverage has not yet been written to correspond with those premiums), those funds must be kept in a separate account from the company's operating funds, and cannot be counted as earned income until the insurance coverage has been written. In addition, the actual premium to be paid may differ from the estimated advance premium. This accounting item is commonly referred to as the advance premium fund or account. As the premium is earned, it is run through the income statement.
The advance premium fund differs from a company's insurance premium trust, which is a separate account that serves to protect customers' premium funds from agency creditors or other claimants. Any premium payment deposited in an agency's trust bank account becomes a “fiduciary” fund subject to insurance code regulations.
Related terms:
Account Current
An account current summarizes the performance of an agent's insurance policies and helps to reconcile payments between the agent and the insurer. read more
Accounting
Accounting is the process of recording, summarizing, analyzing, and reporting financial transactions of a business to oversight agencies, regulators, and the IRS. read more
Advance Premium
An advance premium is an initial premium paid to bind an insurance policy for a given period of time. read more
Balance Sheet : Formula & Examples
A balance sheet is a financial statement that reports a company's assets, liabilities and shareholder equity at a specific point in time. read more
Earned Premium
An earned premium is a pro-rated amount of paid-in-advance premiums that has been "earned" and now belongs to the insurer. read more
Income Statement : Uses & Examples
An income statement is one of the three major financial statements that reports a company's financial performance over a specific accounting period. read more
Insurance Premium
An insurance premium is the amount of money an individual or business pays for an insurance policy. read more
Insurance Underwriter
An insurance underwriter is a professional who evaluates the risks involved when insuring people or assets and establishes the pricing. read more
Premium Balance
Premium balance is the amount of premium that is owed to an insurer for a policy, but which has not yet been paid by the policyholder. read more