Minimum Retained Premium

Reviewed by Stefan Tirschler

Noun

min·i·mum re·tained pre·mi·um | ˈmɪnəməm rɪˈteɪnd ˈpriːmiːəm

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 the end of its effective period.

Mark cancelled his insurance policy after twelve weeks and received a refund because he already paid the insurer’s minimum retained premium.

What is a 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 $1000, 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.

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.

Why do insurance companies have minimum retained premiums?

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.

The important points

  • A minimum retained premium is the non-refundable part of an insurance customer’s premium payments.
  • Most insurance companies have some type of minimum retained premium.
  • Once a customer has paid more than the minimum retained amount, they no longer have to worry about it even if they cancel their policy.
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