How an Advance Premium Fund Works

When an insurance company earns a premium, it usually runs this through the regular income statement. Companies often collect the advance premiums to bind a policy's coverage. They do this whenever someone files an insurance application (during the underwriting process) when issuing a payment check.

Various US states generally regulate the rules governing advance premium funding. They do this strictly since many claims directly offset capital and involve large items from smaller companies. Most companies calculate unearned premiums by prorating such premiums by the number of days in a specific period. Advance premiums involve variable or fluctuating insurance payments (like most payroll-based policies); in such cases, the companies do not know the actual amount involved until much later.

Advanced premiums may involve prepaid premiums (this is a situation in which the policyholder offers an advance premium payment before the due date). The company keeps the funds in a separate account (distinct from its regular operating funds) because the insurer hasn't yet earned the premiums. Also, the company may not yet have written the insurance coverage to correspond with the premiums. Such funds can't usually be considered as earned income until the company writes the insurance coverage (and when it does), the premium may be considerably different from the previously estimated advance premium.

Example of Advance Premium Fund

Stanley is a member of the Jubilee Insurance Company, where he holds an active auto insurance policy. To help him meet his monthly obligations, Stanley registered an account with HACO, a local premium financing company. The company would charge him an agreed amount annually and pay his advance monthly insurance. According to the revised Jubilee Insurance policy guidelines of 2019, Stanley understood that if he paid consistently, he would receive a 5% discount on the total premium dues for the year 2020.

In April 2020, Stanley happily received a $450 check from HACO and paid the premium to his insurer- this was an advance premium for May 2020. HACO continued issuing the monthly checks from April through December 2020. Having fulfilled his obligations, Stanley benefitted from a 5% discount that the Jubilee Insurance Company awarded him on January 1st, 2021.

Significance of the Advance Premium Fund

The advance premium fund generally protects the customer's funds from other claimants (including agency creditors). It's an effective protective mechanism since all premium payments (deposited in the agency's trust bank account) are considered a fiduciary fund (subject to the wider insurance code regulations). Sometimes, the policyholder may receive a discount for paying these advance funds.

With many advance premium funding schemes, the policyholder can determine the due date of the following payment schedule without waiting for the insurer to issue an annual bill. A case in point is automobile insurance coverage. The policyholder can initiate an automated payment using their debit or credit card. The policyholder can usually access the same benefits through the insurer's web portals, where they can check and settle their advance monthly payments.