Amortization

What Does Amortization Mean?

Amortization refers to the schedule created for repaying loans, covering both the principal amount and the interest. It also describes the period during which an asset generates income for a business.

Insuranceopedia Explains Amortization

When a person receives a loan, they are provided with a payment schedule that outlines the dates and amounts of each installment, from the first payment to the last. A copy of this schedule is typically given as a reminder to ensure timely payments. Car loans are a common example, since lenders publish full payment schedules covering interest and principal, and the average car payment has climbed in recent years as both vehicle prices and interest rates have risen.

Amortization also refers to the useful lifespan of a company asset. For instance, if a grocery store purchases a vending machine, the expected period during which the machine will remain functional and generate income is considered in the purchase decision.

In business accounting, an insurance policy is amortized as a prepaid asset. This is because the premium is paid upfront, but the benefits of the insurance are realized over time rather than immediately upon payment. How much of that prepaid premium gets amortized each month depends on the policy itself, and on the factors that shape life insurance premium costs like age, health, and coverage amount.