Adjustable Life Insurance: Definition, Pros & Cons, Vs. Universal
Adjustable life insurance is a hybrid of term and whole life insurance that gives policyholders the ability to customize policy features such as the period of protection, face amount, premiums, and length of the premium payment period.
An interest-bearing savings component, known as a "cash value" account, is also included in adjustable life policies.
Understanding Adjustable Life Insurance
Adjustable life insurance differs from other types of life insurance in that it does not require the insured to cancel or purchase additional policies as his or her circumstances change. It appeals to those who want the protection and cash value benefits of permanent life insurance but require or desire some policy flexibility.
Policyholders can customize their coverage as their lives change by modifying premium payments and face amounts. For instance, a policyholder may wish to increase the face amount after marrying and having children. To accommodate a limited budget, an unemployed person may wish to reduce premiums.
Adjustable life insurance, like other types of permanent life insurance, includes a savings component that earns cash value interest, usually at a guaranteed rate. Policyholders are allowed to make limited changes to critical features of their policy. They can raise or lower the premium, reduce or increase the face amount, lengthen or shorten the guaranteed protection period, and lengthen or shorten the premium payment period.
Policy changes affect the guaranteed period of the interest rate, and changes in the length of the guarantee affect the cash value schedule. The face amount is reduced upon request or in writing. Increasing the face amount, on the other hand, may necessitate additional underwriting, with significant increases necessitating full medical underwriting.
Factors That Can Be Adjusted
In an adjustable life insurance policy, three factors can be changed. There are three of them: the premium, the cash value, and the death benefit. Because this is a permanent life insurance policy that does not expire like a term life policy, all three elements can be adjusted.
Premiums can be changed by changing the frequency or amount of payments, as long as you pay more than the minimum. By increasing your premium payments, you can increase the cash value of your policy. If you withdraw funds or use the cash in the policy to pay premiums, you can reduce your cash amount.
Finally, you can change the amount of your death benefit by decreasing or increasing it. If you decide to increase the death benefit by a significant amount due to a life event, such as the birth of a child, your premiums may increase to reflect the new benefit amount. In some cases, your policy may require additional underwriting.
Advantages and Disadvantages of Adjustable Life Insurance
Although adjustable life insurance provides more flexibility than term life insurance, it is more expensive than a simple 20- or 30-year term policy. If you intend to use adjustable life insurance as an investment vehicle, you might be better off with a tool that pays a higher interest rate. Adjustable life insurance only offers modest interest growth.
Pros
- Cash value grows over time
- You have the option to reduce or increase your death benefit.
- The most adaptable type of life insurance
Cons
- Is expensive to purchase
- Interest income may be modest.
- If you significantly increase your death benefit, your premiums may increase.
Guidelines for Life Insurance Policies and Riders
Section 7702 of the Internal Revenue Code (IRC) defines the characteristics and guidelines for life insurance policies. Subsection C of this section contains premium payment guidelines. The policyholder may not change the premiums in a way that contradicts these guidelines. Increasing premiums may also raise the face amount to the point where proof of insurability is required.
Many life insurers, however, set parameters to prevent violations. Optional riders are common with adjustable life insurance policies. The waiver of premium and accidental death and dismemberment riders are two examples.
Frequently Asked Questions
What Is the Difference Between Adjustable Life Insurance and Universal Life Insurance?
Universal life insurance is also known as adjustable life insurance. There is no distinction between them because they are both types of policies.
What Does an Adjustable Life Policy Allow a Policy Owner to Do?
An adjustable life policy allows the policy owner to change the death benefit amount, adjust their premium payment, and add or subtract money from their cash value.
What Is Credit Life Insurance?
When you take out a large loan, such as a mortgage, you may be offered credit life insurance. If the borrower dies before repaying the loan, this type of life insurance will pay it off. For example, if you co-sign a 30-year mortgage with your spouse and your spouse dies 10 years into the mortgage, the credit life insurance policy will pay off the mortgage in full. Credit life insurance can protect co-signers whose partner or spouse may be unable to make payments on their own.
The Bottom Line
Most traditional policies do not provide the flexibility that adjustable life policies do. However, the frequency of allowable adjustments is limited to specific time periods. Requests must be made within a certain time frame and must adhere to the insurer's guidelines.
The variability in adjustments can result in a policy that resembles either term or whole life insurance. Adjustable life insurance policies effectively allow policyholders to tailor their life insurance to meet current or anticipated needs.
As with any type of permanent policy, it's critical to conduct research on each company under consideration to ensure that they're among the best life insurance companies currently in operation.