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 Cash values can be withdrawn outright or taken as a loan against that value.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

    A type of flexible permanent life insurance offering the low-cost ...
  2. Variable Life Insurance Policy

    A form of permanent life insurance, Variable life insurance provides ...
  3. Variable Universal Life Insurance ...

    A form of cash-value life insurance that offers both a death ...
  4. Whole Life Insurance Policy

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

    A permanent life insurance policy that allows policyholders to ...
  6. Insurance Premium

    The amount of money that an individual or business must pay for ...
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. Financial Advisor

    Which Life Insurance is Right For You?

    Consumers have choices when it comes to life insurance. Knowing your future needs for cash or retirement can make the difference in what you select.
  4. Insurance

    Whole or Term Life Insurance: Which Is Better?

    Learn the difference between term life insurance and whole life insurance. Understand when it is beneficial to buy each type of life insurance.
  5. 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.
  6. 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.
  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

    Permanent Life Policies: Whole Vs. Universal

    If you're looking for life-long security, choosing between these two is the key.
  9. 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.
  10. 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.
RELATED FAQS
  1. What is the difference between term and universal life insurance?

    Term life insurance is the most basic of insurance policies. It is nothing more than an insurance policy that provides protection ... Read Answer >>
  2. If an individual becomes a policyholder of a variable life insurance policy and ...

    The correct answer is b. Insurance companies issuing variable life policies must allow the holders of those policies to exchange ... Read Answer >>
  3. What is term insurance?

    Term insurance is a type of life insurance policy that provides coverage for a certain period of time, or a specified "term" ... Read Answer >>
Hot Definitions
  1. IRS Publication 970

    A document published by the Internal Revenue Service (IRS) that provides information on tax benefits available to students ...
  2. Federal Direct Loan Program

    A program that provides low-interest loans to postsecondary students and their parents. The William D. Ford Federal Direct ...
  3. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  4. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  5. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  6. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
Trading Center