Adjustable Life Insurance

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.

Key Takeaways

  • Adjustable life insurance allows policyholders to make changes to their cash value, premiums, and death benefits.
  • It gives policyholders the ability to reformulate their insurance plans based on shifting life events.
  • There is a savings component, known as a “cash value” account, with adjustable life insurance.
  • When the cash value in an adjustable life insurance policy grows, the policyholder may borrow from it or use it to pay their premiums.
  • The cash value earns interest often at a guaranteed rate, but the interest gains are usually modest.

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 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.

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 critical 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 amount of the death benefit could require additional underwriting, and substantial increases may call for full medical underwriting, which would mean an updated medical exam.

Factors That Can Be Adjusted

Three factors can be changed in an adjustable life insurance policy. These are the premium, cash value, and death benefit. All three elements can be adjusted because this policy is a permanent life insurance policy and does not expire, like a term life policy.

Premiums can be changed by frequency or amount of payments, as long as you pay above the minimum cost. The policy's cash value can be increased by upping your premium payments. You can decrease your cash amount if you withdraw funds or use the cash in the policy to pay the premiums.

Finally, you can adjust your death benefit by decreasing or adding to the amount. If you decide to add a significant amount to the death benefit due to a life event like the birth of a child, your premiums may go up based on the new benefit amount. In some cases, your policy will have to undergo additional underwriting.

Advantages and Disadvantages of Adjustable Life Insurance

Adjustable life insurance gives policyholders more flexibility than term life insurance, but it is more expensive than a simple 20- or 30-year term policy. If you plan on using adjustable life insurance as an investment vehicle, you may be better off with a tool that earns more interest. Adjustable life insurance only provides modest amounts of interest growth.

Pros
  • Cash value grows over time

  • You can decrease or increase your death benefit

  • The most flexible of all types of life insurance

Cons
  • Is expensive to purchase

  • Interest earnings may be modest

  • If you largely increase your death benefit, your premiums may rise

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. Adjustable life insurance policies typically have optional riders. Familiar ones include the waiver of premium and accidental death and dismemberment riders.

What Is the Difference Between Adjustable Life Insurance and Universal Life Insurance?

Adjustable life insurance is another name for universal life insurance. There is no difference between them, because they are the same type of policy.

What Does an Adjustable Life Policy Allow a Policy Owner to Do?

An adjustable life policy allows a policy owner to make changes to the death benefit amount, adjust their payment on their premiums, and add money or remove money from their cash value.

What Is Credit Life Insurance?

Credit life insurance may be offered when you take out a large loan, such as a mortgage. This type of life insurance is used to pay the loan off if the borrower dies before the loan is repaid. For example, if you co-sign a 30-year mortgage with your spouse, and your spouse dies 10 years into the mortgage, the mortgage would be paid in full by the credit life insurance policy. Credit life insurance can protect co-signers, whose partner or spouse might not be able to afford to keep up with payments on their own.



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.