Final answer:
An annual premium is the total amount paid for an insurance policy for a year, while a short-rate premium is charged when a policy is cancelled. The refund amount is calculated based on the number of days the policy was in force.
Step-by-step explanation:
An annual premium is the total amount that a business or individual pays for an insurance policy for a full year, while a short-rate premium is the amount that is charged when a policy is cancelled before the end of the policy term. It is generally higher than the pro-rata premium, which is the portion of the annual premium that reflects the time the policy was in effect.
To calculate the refund amount when a policy is cancelled, the insurance company may use a short-rate table or formula provided in the policy documents. This table or formula calculates the percentage of premium retained by the insurance company based on the number of days the policy was in force.