Adjustable Life Insurance

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What is an 'Adjustable Life Insurance'

Adjustable life insurance is a type of life insurance that combines features of term and whole life coverage, giving policyholders the option to change the characteristics of their policies as their needs change over time. Adjustable life insurance policies allow holders to manipulate the period of protection, increase or decrease the face amount, raise or lower the premium amount, and change the length of the premium payment period. These policies also incorporate an interest-bearing side fund, or cash value.

BREAKING DOWN 'Adjustable Life Insurance'

Adjustable life insurance is also known as "flexible premium adjustable life insurance." It differs from other life insurance products in that there is no requirement to cancel or purchase additional policies as the insured's circumstances change. Adjustable life insurance policies are best suited for individuals who want the protection and cash value benefits of whole life insurance along with an increased measure of flexibility. With the ability to modify premium payments and face amounts, policyholders can customize their coverage as their incomes and indebtedness change through the years.

Adjustable life insurance can apply to certain policy types, such as universal life insurance and variable universal life insurance.

Universal Life Insurance

Universal life insurance combines term insurance with a separate interest-bearing account into which premium payments are made. The interest earned on premium payments is typically pegged to an indexed-based rate such as the London Interbank Offered Rate (LIBOR). The objective of the policy is for the premiums, plus interest earned, to cover the cost of insurance tied to the policy’s face amount. Contributed dollar amounts that exceed the cost of insurance and policy administration fees accumulate inside the policy and comprise the cash value of the policy. Cash values can be withdrawn outright or taken as a loan against that value.

The pitfall of universal life insurance results from the increasing cost of insurance eroding accumulated cash values. In extended low-interest rate environments, minimum interest guarantees of 2% applied to premiums paid may not be sufficient to cover policy costs. The cost of insurance inside a universal life policy, which acts like an annual renewable term policy, increases as a policyholder ages. In this situation, the policyholder has three choices: increase premium payments, lower face amount, or allow the policy to lapse.

Variable Universal Life

A variable universal life policy is structured similarly to a universal life policy. The notable exception is that a variable policy allows the policyholder to invest premiums in sub-accounts such as mutual funds. John Hancock policies offer policyholders a variety of mutual fund families from which to choose. T. Rowe Price and MFS Investment Management funds count among numerous sub-account options whose total return, while not guaranteed, may outpace fixed interest rate options, eliminating the need for policyholders to increase premiums or lower face amounts as insurance costs increase with time.