Adjusted Premium: What it Means, How it Works, Example

What Is an Adjusted Premium?

An adjusted premium is a premium on an insurance policy that does not remain at a fixed price indefinitely. Instead, the rate can move as needed by the insurer, throughout the life of the policy. Life insurance policies calculate the adjustment by amortizing the costs associated with acquiring the insurance policy.

The adjusted premium is equal to the net-level premium plus an adjustment, to reflect the cost associated with the first-year initial acquisition expenses. This method of changing the premium due is different than an adjustable life insurance product. Adjustable life is a whole life hybrid insurance that allows the policyholder to change policy features. Adjusted premiums are typically found on select whole life policies, where the required premium payments may be lower in the early years and then increase in later years, before leveling out.

Whether you choose a whole life insurance policy that allows for adjusted premiums will depend on your specific circumstances, the amount of coverage needed, and other details.

Understanding Adjusted Premiums

The adjusted premium is vital for life insurance companies to calculate, as it is the premium used to figure the minimum cash surrender value (CSV) of the policy, a process known as the adjusted premium method. All life insurance policies are required to calculate a CSV due to the Nonforfeiture Provision, which means that the life insurance policy always has a value, even when the policyholder chooses not to use it for its original purpose, namely, payout upon death.

The CSV is the amount the insured could receive if they opted to terminate the policy early or "cash out." The insured is also entitled to other choices under the provision, including taking a loan against the policy and using the cash value as collateral.

If the insurance company foresees that it will be forced to pay more money than it was anticipating on a policy that has adjustable premiums, the premiums may increase. But, if the insurance policy does not allow for premium adjustments, no changes can happen, regardless of the circumstances. Most insurance policies can be adjusted, as needed, up to a specific set limit.

The adjustment to the net-level premium is an amortization of the expenses associated with establishing the initial insurance policy. Net-level premium is the total cost of the policy between inception to benefit payout, divided by the expected number of years the insurance is to be in force. This premium is one the insurer may alter, moving it up or down, to a limit previously stated within the contract terms. Premiums may adjust based on a change to the policyholder's life expectancy, the returns on the investments made from paid premiums, new company policies, or many other factors.

Real-World Example of an Adjusted Premium

The Workplace Safety and Insurance Board (WSIB) is an independent agency that offered compensation and no-fault insurance for Canadian workers. The group's Merit Adjusted Premium Plan (MAP) used the adjusted premium to reduce premiums by up to 10% at workplaces that were found to have safe environments.

MAP was adjusted the premium rate for a company based on its history of safety. A company must have been in business for at least three years to be a member. Then in the fourth year, the previous three-year period was reviewed and an adjusted premium was put into place for the fifth year. If the firm didn't have any individual claim costing more than $500 during the three-year review period, the premium dropped. If there was a claim for more than $500 or $5,000, or for a fatality, the premium increased.

The one exception was that if a company's accident record was particularly weak, they may receive a premium increase on an accelerated schedule, rather than at year five. The maximum boost possible to the adjusted premium rate was 50%.