Adjusted Premium Method

Unraveling the Adjusted Premium Method in Insurance Policies

The adjusted premium method is a fundamental tool utilized by insurance companies to determine the cash surrender value (CSV) of a life insurance policy, particularly when a policyholder decides to terminate their policy prematurely. In this comprehensive guide, we delve into the nuances of the adjusted premium method, its workings, implications, and real-world applications.

Understanding the Adjusted Premium Method

When policyholders pay regular insurance premiums, a portion goes towards savings, while the remainder contributes to a reserve fund. This reserve fund is crucial for financing the death benefit of the policy, paid out to beneficiaries upon the policyholder's demise. Initially, a higher proportion of premiums is allocated to the reserve fund, resulting in relatively low accumulated savings in the early policy years.

The CSV, drawn from the savings portion of the policy, is a critical consideration for policyholders contemplating cancellation. However, surrendering a policy prematurely can be financially disadvantageous, as insurers often impose surrender fees, diminishing the CSV. The method calculates CSV by subtracting total premiums paid from accumulated expenses and fees, further reduced by surrender fees, particularly significant if the policy is surrendered early.

Real-World Application

Insurance carriers commonly employ the adjusted premium method to determine the CSV when policyholders opt to cancel their policies before term completion. The calculation involves assessing the net-value premium, deducting expense allowances, and factoring in surrender fees, which vary based on the timing of cancellation.

What Is Cash Surrender Value?

Cash surrender value refers to the internal value of an insurance policy at any given point, equal to the accumulation account value minus a surrender charge.

Key Considerations