Unless an insurance claim is filed, prepaid insurance is usually renewable by the policyholder shortly before the expiry date on the same terms and conditions as the original insurance contract. However, the premiums may be marginally higher to account for inflation and other operating factors. For example, if you pay your $1,500 annual home insurance premium in one payment, then sell your house six months into the policy’s term, the insurer will have to refund the unused premium. Although providers do issue prorated refunds, you may have to wait days or weeks to receive the money. Prepaid insurance works similarly to many products or services you pay for fully in advance.
The company will record the payment with a debit of $12,000 to Prepaid Insurance and a credit of $12,000 to Cash. A company’s property insurance, liability insurance, business interruption insurance, etc. often covers a one-year period with the cost (insurance when a business pays for insurance, prepaid insurance is premiums) paid in advance. The one-year period for the insurance rarely coincides with the company’s accounting year. Therefore, the insurance payments will likely involve more than one annual financial statement and many interim financial statements.
Example of Payment for Insurance Expense
It’s considered a current asset on insurers’ balance sheets, offering benefits for payment and coverage readiness. At the end of twelve months, the asset account would show a balance of zero for the insurance premium and a total of $12,000 in the insurance expense account. This model benefits individuals who drive less frequently, such as remote workers, retirees, or urban dwellers who rely on public transportation. By aligning premiums with actual usage, this alternative offers a personalized and potentially cost-effective option for those who may find prepaid insurance less suitable for their needs. In conclusion, while prepaid insurance offers its benefits, alternatives like monthly billing and usage-based insurance cater to diverse preferences and usage patterns, providing more tailored and flexible insurance solutions.
- The concept helps ensure that all parties who have a vested interest in the vessel share the cost and concern of protecting it.
- Moreover, the designation of prepaid insurance as a prepaid asset holds strategic value due to its potential for future economic gains.
- Therefore, a debit of $500 is made to the insurance expense account, indicating the proportionate cost for that month.
- Bonds are typically backed with a mix of cash and assets for collateral equal to 110% of the total judgment, and are returned if the defendant wins on appeal.
- The concept aligns with investments, underscoring how prepaid insurance transcends mere risk mitigation and serves as a dynamic financial instrument that offers both protection and potential rewards.
- The jobs provide a combined $3.3 billion in personal income, according to a CBS News report.
For example, the $1,200 prepaid policy will reduce in value by $100 each month, which you adjust in your ledger. The owner of this website may be compensated in exchange for featured placement of certain sponsored products and services, or your clicking on links posted on this website. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear), with exception for mortgage and home lending related products. SuperMoney strives to provide a wide array of offers for our users, but our offers do not represent all financial services companies or products. The most important calculation regarding prepaid insurance reflects the unexpired portion of the policy. On October 1, the entire insurance payment should be recorded as insurance expense.
Related Post
“The Bonding Companies have never heard of such a bond, of this size, before, nor do they have the ability to post such a bond, even if they wanted to.” Britannia is one of 12 mutual insurers included in the International Group of P&I Clubs, which maintains more than $3 billion of reinsurance cover, sources familiar with the matter told Insurance Business. The collapse could drive “one of the largest claims ever to hit the marine (re)insurance market,” John Miklus, the president of the American Institute of Marine Underwriters, told Insurance Business. The majority of the financial fallout is likely to lay primarily with the insurance industry, according to media reports. General average situations can occur when a ship is stranded or when cargo is damaged or thrown overboard to save the vessel, according to Flexport. The concept helps ensure that all parties who have a vested interest in the vessel share the cost and concern of protecting it.
To account for this payment, an entry of $1,800 is debited to the prepaid insurance account and credited to the cash account on July 1. Prepaid insurance is categorized as a type of prepaid expense, where the payment is made upfront before the services are actually utilized. This holds true for various insurance types, including auto and medical insurance. When prepaid insurance is obtained, the coverage period typically extends into the future, creating a scenario where the insurance contract is not immediately effective. To illustrate, consider the case of auto insurance companies that operate on prepayment schedules.