Short Rate Premium

What Does Short Rate Premium Mean?

A short rate premium is the amount refunded to the policyholder when they cancel a policy before its expiration date. The refund is typically calculated using a short rate table, which takes into account the policy’s inception date, the cancellation date, and the premium paid.

Insuranceopedia Explains Short Rate Premium

When a person cancels a policy, they may assume they will receive the entire premium back or a refund equivalent to the time remaining until the policy expires. However, this is not always the case. Insurance companies often calculate cancellation refunds in a way that discourages policyholders from canceling.

For example, if someone has paid a premium of $1200 for a year-long policy and decides to cancel six months before its expiration, they might expect to receive $600, which is half the amount for half the year of coverage. However, the insurance company will typically charge for the costs associated with setting up the policy. Additionally, the company will likely use a short rate table to apply a penalty percentage based on the time the policy was active or the time remaining. As a result, the refund will likely be less than $600.