Adjusted Premium: Definition & Importance

KEY TAKEAWAYS

• An adjusted premium can get increased or decreased by the insurer depending on circumstances.
• Insurance companies assess the total cost of the policy and then divide it by how many years it’s expected to be in use by the policyholder.
• There can be certain factors that get taken into account. These can include returns from investing paid premiums and the life expectancy of the policyholder.

What Is Adjusted Premium in Insurance?

When you have an insurance policy that includes an adjusted premium, the price doesn’t stay the same for the entire duration of the policy compared to standard premiums. This means that your insurer can increase or decrease the rate throughout the entire policy life. And this can get done regardless if you use public or private insurers.

Life insurance policies use adjusted premiums to calculate any costs that get associated with the insurance policy. They do this by amortizing the costs. So, an adjusted premium will often be the same as a net-level premium, but it includes an adjustment. In a lot of ways, it’s a type of assistance for insurers when it comes to things such as cost claims or health claims.

This gets done to help reflect the different costs associated with the acquisition expenses throughout the initial first year. It’s worth noting that changing the premium in this way differs from adjustable life insurance.

With adjustable life insurance, it’s more of hybrid insurance that lets the policyholder alter some of the policy features when necessary for more generous coverage. You can usually find adjusted premiums on certain whole life policies. This typically happens when premium payments are lower early on and then increase as the policy moves forward. Then, the premium payments will level out closer to the end of the policy life.

A life insurance policy that includes adjusted premiums will often depend on certain details, like the amount of coverage or other specific circumstances. There can also be different adjustment values depending on the risk across insurers and certain time periods.

Why Are Adjusted Premiums Important to Understand in Insurance?

Life insurance companies use adjusted premiums to help calculate a policy’s minimum cash surrender value (CSV). When they do this, it’s done using a process called the adjusted premium method. Every life insurance policy needs to do this because of the Nonforfeiture Provision.

Essentially, this means that every life insurance policy that gets issued must always have a value. And this is still the case even if the policyholder doesn’t use it for its main purpose. With life insurance policies, the primary purpose is a nominal payout should death occur.

So, if a policy gets terminated early or the policyholder chooses to cash out, the CSV is the amount they could receive. As well, the insured person has a few other choices. For example, they could also use the cash value as collateral or take a loan out against the insurance policy.

But why is all of this important to understand? Because an insurance company needs to determine if there’s a likelihood they might have to pay out more money than expected. If they foresee that this could happen, they can increase the premiums if the policy includes adjusted premiums.

The majority of insurance policies have the option to get adjusted when needed but only up to a certain limit. On the flip side, if the policy doesn’t include the option for premium adjustments then changes can’t get made. And this is also regardless if there are any other circumstances to consider.

Summary

Insurance policies are intended to provide peace of mind and a type of safety net should something unfortunate happen that’s out of your control. Yet, not all policies are created the same or include the same provisions. Adjusted premiums are common with many insurance policies, and they allow the insurer to increase or decrease premium payments.

There could be a single adjustment type or a more robust risk adjustment system. It’s largely going to depend on the specific company, competitive markets, potential benefits, and the individual claim. For example, the private health insurance market can have continuous coverage provisions or excessive coverage for medical claims. They might also have a different level of product standardization compared to others.

Be sure to discuss access to coverage details with your insurer when looking into plan selection. Find out about things like the minimum benefit level, adjustment types, selection incentives, and the policy calculation period. There might even also be partial calculation periods and a default time period worth understanding.