Proration

What Does Proration Mean?

Proration is the act of distributing or charging money in proportion to a related factor.

Insuranceopedia Explains Proration

Proration is often used when a payment is adjusted proportionally due to an external factor that prevents full payment. A common example is when someone rents an apartment on the 15th of the month; by the 30th, they are only expected to pay half of the month’s rent based on the length of their tenancy.

Another instance of proration occurs when a corporation decides to pay shareholders with a combination of shares and cash because it cannot fully compensate them with either option alone.

In insurance, proration most often comes up with premiums. When a policyholder cancels a policy mid-term, the insurer refunds the unused portion of the premium, and when someone signs up partway through a billing cycle, the first payment only covers the remaining days of that period. Pay-as-you-go car insurance follows the same idea by billing drivers based on actual mileage instead of a flat monthly rate, and the cost of renters insurance is usually prorated this way when a policy starts mid-month, so the first payment only covers the remaining days.