DEFINITION of 'Adjusted Premium'
An adjusted premium is the premium of a life insurance policy that is adjusted 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.
The adjustment to the net-level premium is an amortization of the expenses associated with establishing the initial insurance policy. The net-level premium is the total cost of the policy (from inception to payout), divided by the number of years the policy is expected to be in force. This term is specific to life insurance companies.
BREAKING DOWN 'Adjusted Premium'
The adjusted premium is important for life insurance companies to calculate, as it is the premium used to figure the minimum cash surrender value (CSV). 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 policy holder chooses not to use it for its original purpose (payout upon death).
The CSV is the value that could be received by terminating the policy and choosing to "cash-out." The insured is entitled to other choices under the provision, including taking a loan against the policy using the cash value as collateral.