Prorating an Assumed Insurance Policy for the Real Estate Investor

As insurance policy premiums are normally paid in advance, if a buyer is assuming a policy in a real estate investment transaction, the policy premium must be prorated. The buyer will owe the seller the amount prepaid, but as yet unused, for the policy effective coverage period.

As in all real estate transfer prorations, we'll need to know whether we're prorating "through" or "to" the date of closing, as well as whether we're using a 360 day "banker's year" or a 365 day calendar year. The steps are:

1. Determine the number of days from the closing to the day of policy expiration.

2. Calculate the amount per day of cost of the insurance.

3. Multiply the number of days times the amount per day.

Let's do a samle insurance proration. A real estate investor is assuming the insurance policy on a rental property. The annual premium for the policy is $1350. The policy premium was paid in full on February 12, and the closing is on October 15 of the same year. We are using a calendar 365 day year and prorating "through" closing. This means the seller pays for the day of closing.

1. # of days from Oct 16 through Feb 11 next year is:
Oct 16 + Nov 30 + Dec 31 + Jan 31 + Feb 11 = 119 days

2. $1350 divided by 365 days = daily cost of $3.70

3. $3.70 cost/day X 119 days = prorated amount of $440.30.

This amount would be CREDITED to the Seller and DEBITED to the Buyer.