Adjustable Premium

What is Adjustable Premium

The term adjustable premium refers to an insurance policy's monthly payment that fluctuates over time. Adjustable premiums are paid in adjustable life insurance policies. They allow certain features to be adjusted throughout the life of the insurance contract including premiums and the policy's protection period, among others. Contracts with adjustable premiums give policyholders a chance to customize their policies when they experience changes in their lives.

Understanding Adjustable Premium

Life insurance is a type of insurance policy that is paid out upon the insured's death, or after a certain amount of time has passed. Life insurance policies can vary based on premium amounts and age requirements. For example, some policies allow premiums to be customized and flexible while others have fixed monthly or annual premiums. Life insurance policies generally require individuals to undergo a health checkup, complete with blood work and drug tests. Depending on their health, younger people may pay lower premiums compared to those who are older or in poorer health.

Certain policies allow individuals to take advantage of lower premiums as their circumstances change. These policies are called adjustable, variable, or flexible insurance policies. Features that may be changed include a policy's face value, the amount of time an individual is covered, and how much they pay in premiums. These are called adjustable premiums and, in some cases, may also be referred to as variable or adjustable premiums. The money from a premium in these insurance policies is split into two components. One portion goes toward the cash value of your account, where it is invested for returns. The other part pays any costs to maintain and administer the insurance policy.

Premiums may increase or decrease in these policies based on external factors such as interest rates or market performance. Factors like higher than expected maintenance costs on the policy may also cause the rates to increase. On the other hand, increased investment returns from the insurance company could lessen the monthly outlay. Consumers often seek out these kinds of policies when they want flexibility in their monthly payment or when they expect their lifestyle situation to change over time and would like to have their payments change with it.

Key Takeaways

  • Adjustable premiums are fluctuating monthly payments made to the provider of an adjustable, variable, or flexible life insurance policy.
  • These premiums vary based on external factors such as interest rates or market performance.
  • Consumers generally seek adjustable premiums for life insurance policies during times of change or when they require flexibility in their monthly payments.

Special Considerations

Adjustable premium policies are common in the life insurance industry. The opposite of this kind of policy is a fixed premium insurance policy. Fixed premium policies are the most common type of insurance policy. The terms of an adjustable life insurance policy are determined ahead of time. This means that the adjustable or variable premiums are not a surprise to the insured. The margin for change, though, should be agreed upon at the signing of the enforcement.

You should agree upon the margin of change for your adjustable premiums before you sign up for an adjustable life insurance policy.

Example of an Adjustable Premium

Let's take a hypothetical example to show how adjustable premiums work. Consider a situation in which you secure a new job, one that pays significantly higher than your previous job. An adjustable premium allows you to increase your premium amount, thereby increasing the amount of money that goes into the cash value component of your policy. This may end up generating more income for you in the long run, as long as markets cooperate. But what happens if you lose your job and can no longer pay the full amount of your premium? Having an adjustable policy with adjustable premiums gives you an opportunity to pay the minimum amount due until the time that you find a new job.

Article Sources
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  1. National Association of Insurance Commissioners. “Life Insurance.” Accessed Aug. 3, 2021.

  2. Insurance Information Institute. “What are the different types of permanent life insurance policies?” Accessed Aug. 3, 2021.

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