Short Rate Premium

Definition - What does Short Rate Premium mean?

Short rate premium is the money refunded to the policyholder when they cancel a policy prior to its expiration date. The amount is usually calculated based on a short rate table that combines the inception date, the date of cancellation, and the premium paid.

Insuranceopedia explains Short Rate Premium

When a person cancels a policy, they might think that they get back the entire premium or the money equal to time left until it expires. This is not necessarily the case. Insurance companies calculate money for cancellation to even dissuade people from cancelling.

For example, a person has paid a premium amount of $1200 for a year's policy. That person decides to cancel six months before expiration. He would be frustrated to know that he will not get $600 or half the amount for half the year of being insured. The company will charge the policyholder for costs of putting up the policy. The company will also likely consult a short rate table that has a percentage of penalty taken from the length of time that the policy was in effect or the time left for its expiration. These methods combined will yield an amount less than $600.

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