When the insured cancels a policy, what is typically refunded?

• A. The insured must pay a cancellation fee
• B. The policy ends immediately with no refund
• C. The insured receives a refund of unearned premium
• D. The insurer issues a full refund of all premiums

Answer: (C)

When a policy is canceled, the insurer has already provided coverage for part of the term, so that portion of the premium is considered earned. The remaining portion, which would cover future days, is unearned. The typical refund reflects this unearned portion, prorated to the cancellation date. For example, if a yearly premium of $600 is paid and cancellation occurs after 3 months, about 9 months of coverage remain, so the refund would be about $450 (the unearned portion). Some policies may apply a short-rate cancellation or a fee, which can reduce the refund, but the standard concept is refund of the unearned premium.