Noun
min·i·mum re·tained pre·mi·um | ˈmi-nə-məm ri-ˈtānd ˈprē-mē-əm
Definition: The smallest amount of payment an insurer will accept in return for issuing a new policy, applicable even if the policy is terminated before its effective date.
Mark cancelled his insurance policy a day before it took effect and received a partial refund because the insurer retained the minimum retained premium.
A minimum retained premium represents the smallest amount of money an insurer will accept in return for issuing a policy, or the non-refundable part of a customer’s premiums.
If you buy an insurance policy with a minimum retained premium of $50, it means the insurer will keep the first $50 of your premiums even if you cancel the policy immediately.
There’s a common misconception that minimum retained premiums are an extra fee. That’s not the case; if you’ve already paid more in premiums than the minimum retained amount, it won’t affect you at all—even if you cancel.
If you’ve paid less than the minimum amount when you cancel, you will still owe the rest.
Example
Raul recently bought a tenant insurance policy with a minimum retained premium of $50. His monthly premium payments are $10. After just two months, Raul cancels his policy because he’s moving. At that point, he’s paid a total of $20 in premiums, but the minimum retained premium is $50. The insurance company will collect another $30 from Raul, even though he’s cancelling now, since he agreed to the minimum retained premium when he bought the policy.
Stacey bought a home insurance policy from the same company. Her monthly premiums are $100, and her minimum retained premium is $50. However, she decides to buy a different policy instead, and requests to cancel the first policy at once. She’s already made her first payment, so the insurance company refunds her $50: that’s her premium payment of $100 minus the $50 minimum retained premium.
When you buy an insurance policy with a minimum retained premium, you are agreeing to pay at least that much regardless of when you cancel. But, once you’ve paid more than that amount, you can cancel any time and receive a refund for unused premiums (within the limits of your policy wordings, of course).
Minimum retained premiums are also commonly called minimum earned premium. An earned premium means a premium that the insurance company has, well, earned.
Normally, insurance customers pre-pay their premiums. If one buys a 1-year insurance policy for $1,000, the insurance company hasn’t earned all that money up-front, even though they’ve collected it. They earn it as the year passes. After 6 months, the premium has been 50% earned. After 12 months, it’s 100% earned.
If you cancel your policy before they’ve earned the premiums you already paid to them, they’ll refund the unearned premiums (or the total premium less the minimum retained premium).
The minimum retained/earned premium represents the amount of money the insurance company earned just by issuing the policy, so they get to keep that amount even if a customer cancels immediately after buying the policy.
Policies sold by Square One include a minimum retained premium of $50. After you’ve paid at least that much in total premiums, you can cancel at any time with no fees.
As we’ve established, when an insurance customer buys a policy and then cancels it immediately, the insurer usually keeps at least part of their premium payments.
In such a situation, it may seem like the insurance provider hasn’t actually done anything. But there are quite a few things going on in the background when an insurance company sells a new policy.
The minimum earned premium helps them cover the costs associated with issuing new policies.
These costs include things like the time agents or underwriters spend preparing the new policy, the fees that banks charge the insurer for processing payments, plus the insurer’s general administration costs like rent or electricity.
Looking for another insurance definition? Look it up in The Insurance Glossary, home to dozens of easy-to-follow definitions for the most common insurance terms. Or, get an online quote in under 5 minutes and find out how affordable personalized home insurance can be.
About the expert: Daniel Mirkovic
A co-founder of Square One with 25 years of experience in the insurance industry, Daniel was previously vice president of the insurance and travel divisions at the British Columbia Automobile Association. Daniel has a bachelor of commerce and a Master of Business Administration (MBA) from the Sauder School of Business at the University of British Columbia. He holds a Canadian Accredited Insurance Broker (CAIB) designation and a general insurance license level 3 in BC, Alberta, Saskatchewan, Manitoba and Ontario.
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