Insurance expense is that amount of expenditure paid to acquire an insurance contract. The amount paid is charged to expense in a period, reflecting the consumption of the insurance over a period of time. If insurance relates to a production operation, such as the property coverage for a factory building, this expense can be included in an overhead cost pool and then allocated to the units produced in each period. Doing so means that some of the insurance expense will be included in ending inventory, and some will be assigned to the units sold during the period, so that the expense appears in the cost of goods sold.
For example, a business spends $12,000 in advance for liability insurance coverage for the next twelve months. The company records this expenditure in the prepaid expense account as a current asset. This is considered unexpired insurance. In each of the next 12 successive months, the business charges $1,000 of this prepaid asset to expense, thereby equably spreading the expense recognition over the coverage period.
Insurance expense is also known as an insurance premium.