What Is Adjustable Life Insurance?
Adjustable life insurance is a hybrid of term life and whole life insurance that allows policyholders the option to adjust policy features, including the period of protection, face amount, premiums, and length of the premium payment period.
Adjustable life policies also incorporate an interest-bearing savings component, known as a “cash value” account.
Understanding Adjustable Life Insurance
Adjustable life insurance differs from other life insurance products in that there is no requirement to cancel or purchase additional policies as the insured’s circumstances change. It is attractive to those who want the protection and cash value benefits of permanent life insurance yet need or want some level of flexibility with policy features.
Using the ability to modify premium payments and face amounts, policyholders may customize their coverage as their lives change. For example, a policyholder may want to increase the face amount upon getting married and having children. An unemployed person may want to reduce premiums to accommodate a restricted budget.
- Adjustable life insurance allows policyholders to change policy features, within certain limits, without having to cancel or purchase additional policies.
- It gives policyholders the ability to reformulate their insurance plans to conform with changes in their lives.
- There is a savings component, known as a “cash value” account, with adjustable life insurance.
As with other permanent life insurance, adjustable life insurance has a savings component that earns cash value interest, usually at a guaranteed rate. Policyholders are permitted to make changes to key features of their policy within limits. They may increase or decrease the premium, increase or decrease the face amount, extend or shorten the guaranteed protection period, and extend or shorten the premium payment period.
Adjustments to the policy will alter the guaranteed period of the interest rate, and changes in the length of the guarantee will change the cash value schedule. Decreasing the face amount is done upon request or in writing. However, increasing the face amount may require additional underwriting, with substantial increases requiring full medical underwriting.
Increasing the face amount of an adjustable insurance policy may require additional underwriting, and substantial increases may call for full medical underwriting.
Guidelines for Life Insurance Policies and Riders
Internal Revenue Code (IRC) Section 7702 defines the characteristics of and guidelines for life insurance policies. Subsection C of this section provides guidelines for premium payments. The policyholder may not adjust the premiums in a manner that violates these guidelines. Increasing premiums may also increase the face amount to the point that it requires evidence of insurability.
However, many life insurers set parameters to prevent violations.
The Bottom Line
Adjustable life policies provide the flexibility that most traditional policies do not. However, the frequency of allowable adjustments is restricted within set time frames. Requests must be made within an allotted period and meet the guidelines set by the insurer.
The variability in adjustments can create a policy that mirrors either term life insurance or whole life insurance. Effectively, adjustable life insurance policies allow policyholders to customize their life insurance to meet current or anticipated needs.
As with any kind of permanent policy, it's critical to research every firm that's being considered to ensure that they're among the best life insurance companies currently operating.