Unearned Premium

### Why is part of a prepaid premium considered unearned? - [x] Because the coverage period has not yet occurred. - [ ] Because some policies have higher risk. - [ ] Because the policyholder might change the policy. - [ ] Because policies are always refundable. > **Explanation:** An unearned premium is considered unearned because the portion of the premium represents future coverage periods that have not yet occurred. ### How is an unearned premium classified on an insurer's balance sheet? - [ ] As a revenue - [x] As a liability - [ ] As an asset - [ ] As an equity > **Explanation:** Unearned premiums are classified as liabilities because they represent an amount that the insurer owes in future coverage. ### Which of the following would result in a refund of the unearned premium? - [x] Cancellation of the policy by the policyholder - [ ] Renewal of the policy - [ ] Adjustment of coverage limits - [ ] Policyholder not filing a claim > **Explanation:** If the policyholder cancels the policy before its term end date, the insurance company needs to refund the unearned premium. ### How often is unearned premium typically recalculated? - [ ] Monthly - [ ] Annually - [x] Continuously, as part of routine financial management - [ ] Only when a policy is canceled > **Explanation:** Unearned premiums are continuously recalculated as part of the insurer’s routine financial management practices to accurately present liabilities. ### What does a high amount of unearned premiums suggest about an insurance company? - [ ] They have more claims than expected. - [ ] They mismanage their finances. - [x] They have received substantial prepayments for future coverage. - [ ] They have few policy cancellations. > **Explanation:** A high amount of unearned premiums suggests that the insurance company has received substantial prepayments for coverage extending into future periods. ### What is the primary purpose of unearned premium reserves? - [x] To ensure the funds are available to refund policyholders if policies are canceled. - [ ] To calculate expected insurance benefits. - [ ] To cover administrative costs. - [ ] To lower the insurer’s taxable income. > **Explanation:** Unearned premium reserves are set aside to ensure that funds are available to refund policyholders if they cancel their policies. ### What's likely to happen to unearned premiums over the policy term? - [ ] They remain constant. - [x] They decrease as the premiums are earned. - [ ] They increase due to interest. - [ ] They vary based on claims filed. > **Explanation:** Unearned premiums decrease over the policy term as they are progressively earned by the insurer as coverage is provided. ### When reclassified, where do unearned premiums move to on financial statements? - [x] From liabilities to revenue - [ ] From assets to liabilities - [ ] From equity to assets - [ ] From revenue to equity > **Explanation:** As premiums are earned, they are reclassified from liabilities to revenue on financial statements. ### How can policyholders benefit from understanding unearned premiums? - [ ] By decreasing their coverage limits. - [x] By knowing the amount refundable if they cancel their policy early. - [ ] By negotiating lower premiums. - [ ] By asking for higher coverage limits. > **Explanation:** Understanding unearned premiums helps policyholders know how much they can get back if they cancel their policies before the term ends. ### Which accounting principle most directly involves unearned premiums? - [ ] Conservatism principle - [x] Revenue recognition principle - [ ] Matching principle - [ ] Entity-specific principle > **Explanation:** The revenue recognition principle involves unearned premiums, indicating that revenue should only be recognized when it is earned.