What is Prepaid Insurance and Why it is Important?

The majority of insurance policies are prepaid insurance, meaning, you need to pay the premium for the policy in advance. This is treated as an asset for the insurer.

It has the following characteristics:

a) The premium of a prepaid insurance policy is paid before the commencement of the policy.

b) Usually, the premium is payable only for a year. However, you can secure more than one year of insurance with a single premium payment.

c) You can pay a single premium for long-term life insurance plans.

d) The Premium you pay for continuing the policy is the renewal premium. You need to pay renewal premiums for the policies with the regular premium payment option.

e) You can pay the regular premium as a monthly, quarterly, half-yearly or annual payment.

Prepaid insurance is treated as an asset and thus shown under the current asset section of an insurance company’s balance sheet. This is because the insurance is unused. However, it becomes an expense when a claim arises and is paid off.