Since hazard insurance premiums are paid up-front, the buyer will have to reimburse (credit) the seller a portion of the premium at the closing. Suppose that the insurance policy's coverage began on December 15ᵗʰ of the prior year and the property transaction is set to close on March 16ᵗʰ of a 365-day year. The premium paid originally by the seller was $250. If the coverage will expire as of the end of day December 14ᵗʰ in the current year, what is the dollar amount that the buyer must credit the seller?

Question

Quizplus · Accepted Answer

The coverage period for the insurance policy was from December 15th of the prior year to December 14th of the current year, which is a period of 365 days. The property transaction is set to close on March 16th of the current year, which means that the seller has already paid for 91 days of coverage (from December 15th to March 16th).

To determine the amount that the buyer must credit the seller, we need to calculate the prorated amount of the premium for the remaining 274 days of coverage (from March 17th to December 14th).

To do this, we can use the following formula:

Prorated amount = (Number of days of coverage ÷ Total number of days in the policy period) x Premium amount

Prorated amount = (274 ÷ 365) x $250 = $187.67

Therefore, the buyer must credit the seller $187.67 at the closing. The correct answer is C.

Since Hazard Insurance Premiums Are Paid Up-Front, the Buyer Will