A minimum earned premium is the lowest dollar amount an insurer will retain to write a business insurance policy. In other words, it’s the smallest transaction the insurance company will accept to provide coverage to the insured.

Usually, the minimum earned premium comes into play if you decide to cancel your business insurance policy before the term is up. Read on to learn how minimum earned premiums work and what you should know when you purchase an insurance policy for your business.

What is a minimum earned premium?

When you sign up for insurance, you agree to pay a premium in exchange for an agreed-upon amount of protection. That protection covers a specific set of risks and liabilities over a given term.

A minimum earned premium is the specific proportion of your premium an insurer will collect if you cancel your coverage before the end of your term. Depending on your policy details, it may be up to 100% of your term payment or lower. The minimum helps cover the expense of underwriting and issuing the policy, even if you decide to end your policy before the term is up.

How to calculate minimum earned premium

How to calculate the dollar value of your minimum earned premium depends on the details of your policy, including the total cost of the policy over the term and the minimum earned premium percentage.

For example, you purchase a plan with an annual premium of $1200 and a 50% minimum earned premium. You also agree to pay it in monthly installments. The maximum you would pay for the whole year is $1200. The minimum earned for an amount of time less than a full year is $600. If you cancel your insurance policy after paying more than $600 but less than $1200, you would be entitled to a refund only for the unearned portion exceeding the minimum.

Depending on how long you fulfill your commitment, some scenarios could occur within this hypothetical:

  • You carry the plan for the full policy term paying the full $1200.
  • You cancel after 3 months, having paid $300, and still owe $300.
  • You cancel after 6 months, having paid $600, and fulfill your obligation.
  • You cancel after 9 months, having paid $900, and fulfill your obligation. You might be eligible for a partial refund.

How does minimum earned premium affect your insurance policy?

The minimum earned premium doesn’t affect the details of your insurance policy, including the coverages and term length of your policy. The minimum earned premium only impacts what you owe your insurer if you cancel your policy before the expiration date on your contract

If you’ve paid your policy in full for the term, you may be eligible for a partial refund. In other cases, you may have to pay your insurer an additional amount in order to meet the minimum earned premium.

What’s the purpose of the minimum earned premium?

Insurance providers stipulate a minimum earned premium in order to protect themselves from losses if a customer decides to cancel a policy and then submits a claim. In the event that you cancel before your term is up, you’re still accountable for an agreed-upon percentage of what you’d pay if you kept the commitment for the whole term.

The downsides of minimum earned premium

Minimum earned premiums can make it more expensive to cancel a business insurance policy mid-way through the term. One of the primary purposes of a minimum earned premium is to cover the insurance company’s expense for issuing the policy. The higher the minimum earned premium percentage is, the less likely policyholders will be to cancel their policy early.

Minimum earned premiums help to protect insurers against bad faith cancellations, where policyholders purchase a plan for a longer term than is required, with the intention of canceling it after a short-term need.

Thimble: simplifying small business insurance

Minimum earned premiums are just one component of business insurance that small business owners and entrepreneurs should know. At Thimble, we’re on a mission to make business insurance simple, scalable, and flexible so you have coverage when and where you need it. We offer general liability insurance policies, professional liability insurance policies and many other types of small business insurance.

You can get coverage by the job, month or year. You’re free to change, pause or cancel your policy whenever work slows down or picks up. You can get a quote and buy a policy online, in the app, or over the phone in just a few minutes. What are you waiting for?