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Adjusted Premium: Definition & Importance

Updated: February 15, 2023

There are several types of insurance policies that are designed to protect your business. Sometimes things happen that are out of your control. So having that added peace of mind can help you focus on the areas of business that matter most.

But not all insurance policies are created equal. There are ones specifically designed to cover things like damage to property, for example. And others are designed to protect against things like loss of income. As well, there can be adjustable premiums that can fluctuate and get adjusted.

So when does this happen and how can it affect the insurance policy you have? Keep reading our guide to learn everything you need to know about an adjusted premium in insurance!

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    • 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.

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    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.

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    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.

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    FAQs on Premium Adjustment

    What Is Minimum Premium Adjustment?

    When you’re provided a particular type of insurance coverage, the minimum premium adjustment is the least amount that can get charged. It can apply in a few different ways, like per policy, per type of coverage, or per location, for example.

    What Is a Premium Adjustment Clause?

    Essentially, a premium adjustment clause allows for a total return of up to 50% of your initial premium amount. Any premium that gets paid at the start of the insurance period gets based on the final sum to be insured.

    What Is the Difference Between Earned and Unearned Premium?

    Earned premiums are premiums that belong to an insurer and that get paid in advance. Unearned premiums are determined by insurance firms in advance. This happens when they’re required to give them back to policyholders if they terminate coverage before the premium period ends.

    How Does Social Security Determine You Have a Higher Premium?

    Insurance companies can use recent federal tax returns from the IRS to help determine this. There’s a sliding scale to help calculate any adjustments and it’s all based on modified adjusted gross income levels (MAGI).


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