Loading the player...

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 Cash values can be withdrawn outright or taken as a loan against that value.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.

RELATED TERMS
  1. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  2. Whole Life Insurance Policy

    A life insurance contract with level premiums that has both an ...
  3. Equity-Indexed Universal Life Insurance

    A permanent life insurance policy that allows policyholders to ...
  4. Voluntary Life Insurance

    A financial protection plan that provides a beneficiary with ...
  5. Term Life Insurance

    A policy with a set duration limit on the coverage period. Once ...
  6. Guaranteed Issue Life Insurance ...

    A type of financial-protection policy that provides cash to a ...
Related Articles
  1. Retirement

    Understanding Different Types of Life Insurance

    Understand the various types of life insurance, how each can be used in personal or business financial planning, and for whom they are best-suited.
  2. Insurance

    Understanding Taxes on Life Insurance Premiums

    Learn about the tax implications of life insurance premiums, including when they might be taxable and whether they are tax deductible.
  3. Insurance

    What's Better: Whole Life or Term Insurance?

    Life insurance can be a difficult decision to make, especially for a young adult. Here's a look at the benefits and costs of getting whole life insurance.
  4. Retirement

    Beware the Sneaky Math of Universal Life Insurance

    Universal life insurance's cash value can be a cash cow – if there's any left. Read on to see if it'll work as an income source after you've retired.
  5. Financial Advisor

    Getting Life Insurance in Your 20s Pays Off

    Find out how Americans in their 20s can benefit from a well-thought-out life insurance policy, especially if they are able to build cash value for retirement.
  6. Financial Advisor

    Permanent Life Policies: Whole Vs. Universal

    If you're looking for life-long security, choosing between these two is the key.
  7. Financial Advisor

    Advising FAs: Explaining Life Insurance to a Client

    Life insurance was initially designed to protect the income of families, particularly young families in the wealth accumulation phase, in the event of the head of household's death.
  8. Financial Advisor

    Pros and Cons of Indexed Universal Life Insurance

    Indexed universal life insurance has its pros and cons. Here's what you need to consider before purchasing a policy.
  9. Personal Finance

    The Best Life Insurance for Military Families

    Two of the most common types of life insurance are term and whole life. Here's why the latter isn't a good idea for most military families.
Hot Definitions
  1. Restricted Stock Unit

    Compensation offered by an employer to an employee in the form of company stock. The employee does not receive the stock ...
  2. Operating Ratio

    A ratio that shows the efficiency of a company's management by comparing operating expense to net sales. Calculated as:
  3. Expense Ratio

    A measure of what it costs an investment company to operate a mutual fund. An expense ratio is determined through an annual ...
  4. Pro Forma

    A Latin term meaning "for the sake of form". In the investing world, it describes a method of calculating financial results ...
  5. Trumpcare

    The American Health Care Act, also known as Trumpcare and Ryancare, is the Republican proposal to replace Obamacare.
  6. Free Carrier - FCA

    A trade term requiring the seller to deliver goods to a named airport, terminal, or other place where the carrier operates. ...
Trading Center