Final answer:
A Premium Refund is when an insurance company cancels a policy and returns the unearned premium minus a fee for overhead expenses. This fee covers the expenses incurred while the policy was in effect. Premium refunds account for the money not used due to early policy termination.
Step-by-step explanation:
When an insurance company cancels a policy and returns the unearned premium minus a fee for overhead expenses, this is known as a Premium Refund. The terms premium reimbursement, premium forfeiture, and premium deduction don't accurately describe this scenario. Money flows into an insurance company through premiums and investments, and out through the payment of claims and operating expenses. The unearned premium is the portion that the policyholder has paid in advance and is not used because the policy is terminated before its expiration date. The company may deduct a fee to cover administrative costs associated with the termination of the policy before issuing the refund. This fee accounts for the expenses that the insurance company incurs during the policy's active period.