Understanding Insurance Proration: A Case Study for Georgia MLS Students

If an annual hazard insurance policy premium is $800 and the closing date is June 8, what is the insurance proration for the seller?

• A. $200.00 debit to seller
• B. $155.62 credit to the seller
• C. $300.00 credit to the buyer
• D. $100.00 debit to buyer

Answer: (B)

To determine the insurance proration for the seller, it’s important to first find out how much of the insurance premium has been used by the time of closing. An annual premium of $800 implies a monthly cost of approximately $66.67 ($800 divided by 12 months). Since the closing date is June 8, the seller will not owe for the month of June after the closing. Therefore, we need to calculate how many days of insurance would have been used by the seller, which is 7 days in June (from June 1 until June 7, since the seller is responsible for expenses up to the day before closing). To find the daily rate, the annual premium is divided by 365 days, equaling approximately $2.19 per day ($800 divided by 365). Multiplying this daily rate by the 7 days gives about $15.33 that covers the seller's portion. Since the seller is responsible for the insurance premium incurred up to the closing date, that amount is subtracted from the total premium. The buyer, typically, takes over the insurance responsibility from the closing date forward. The calculation shows that the buyer will essentially receive a credit for the days of insurance not used after the closing date

Breaking Down Insurance Proration in Real Estate

Navigating the world of real estate can sometimes feel like you’re reading a foreign language. But don’t worry; we’re here to help you decode the complexities of concepts like insurance proration, especially for those gearing up for the Georgia MLS exam.

What’s Insurance Proration Anyway?

You might be wondering, "What’s the deal with insurance proration?" Great question! In the context of real estate, proration refers to how certain expenses—like insurance premiums—are allocated between the seller and the buyer at closing. Basically, it ensures that each party only pays their fair share based on the date of closing.

A Real-Life Example to Clarify Things

Let's roll up our sleeves and dive into a straightforward example that reveals how this all works in practice. Suppose you're faced with an annual hazard insurance policy that costs $800. Handy, right? The closing date is set for June 8.

Now, stay with me. You’ll need to find out how much insurance has been used before the closing date.

Step-by-Step Breakdown

1. Calculate Monthly Cost: Since we know the annual premium is $800, that breaks down to a monthly cost of about $66.67 (

$800 ÷ 12). Easy math!

2. Determine the Seller's Responsibility: Since we close on June 8, the seller is responsible for the premium up until that closing date, meaning only the first seven days of June count here.

3. Find the Daily Rate: Here’s where it gets a bit involved. To calculate the daily rate, you take the annual premium ($800) and divide it by 365 days, which gives us approximately $2.19 per day ($800 ÷ 365).

4. Calculate Seller's Usage: Multiply that daily rate by the 7 days from June 1 to June 7. This equals about $15.33.

5. Final Touch – The Seller’s Credit: Since the buyer will take over insurance responsibilities from the closing date on, you subtract $15.33 from the total premium ($800), showing that the seller's total unused premium translates into a credit of $155.62 (remainder is $784.67).

Doesn’t that make things a bit clearer?

Why This Matters

Understanding proration is essential in real estate. Not only does it help ensure fairness in financial transactions, but it also empowers you with the knowledge to navigate negotiations like a pro. And trust me, your future clients will appreciate you knowing the ins and outs.

Reflect for a second: How many times have you been in a negotiation where a minor detail suddenly became a tipping point? This is that detail for many buyers and sellers!

Conclusion: Nail That Exam!

From my perspective, grasping the ins and outs of insurance proration can give you an edge on the Georgia MLS exam and in actual transactions. Just remember: it’s about fairness and ensuring both parties are ready for their responsibilities.

As you study, keep this example handy. It might just come in handy when you’re in a tight spot during the exam or in a real estate deal! Good luck—you’ve got this!