What Is Adjustable Life Insurance?

What Is Adjustable Life Insurance?

I'm here to explain adjustable life insurance directly to you. It's a policy where you can modify features after you sign up, such as the premium payments and the death benefit. You might also hear it called universal life, and it comes with an interest-bearing savings part called the cash value account, which you can access while you're still alive.

These policies demand more planning and management from you in return for greater flexibility compared to other types. If you're thinking about getting one, here's what you need to know.

Key Takeaways

You can make changes to the cash value, premiums, and death benefit in adjustable life insurance. It provides the flexibility to tweak your coverage as life events change. There's a savings element known as cash value included. As that cash value builds up, you can borrow from it or use it to cover premiums. The account earns interest, but the gains are usually modest.

Understanding Adjustable Life Insurance

Adjustable life insurance is a form of permanent life insurance that can cover you for your whole life, as long as you keep up with the premiums. It stands out from products like whole life because you get much more leeway to alter the policy terms after you've started it.

For instance, whole life sticks to the same monthly premium forever, but with adjustable life, you can adjust how much you pay each year, just as long as you cover the basic cost of the insurance. You might pay more when your income is high and cut back during tough times, like after losing a job.

Like other permanent policies, it has a cash value savings feature that earns interest based on market rates, which can fluctuate yearly. You can pull out that cash value via a withdrawal or loan, or even use it to pay future premiums.

This is the most flexible insurance type out there. It's a good fit if you want the protection and cash value perks of permanent insurance but need some adjustability in the features.

Important Note on Changes

Keep in mind that altering the death benefit might call for additional underwriting or even a new medical exam.

Factors That Can Be Adjusted

In an adjustable life policy, you can change three main things: the premium, cash value, and death benefit. These adjustments are possible because it's a permanent policy that doesn't expire like term life does. You can tweak premiums by changing how often or how much you pay, as long as you meet the minimum cost for the insurance.

You can boost the cash value by increasing your premium payments. On the flip side, you can reduce it by withdrawing funds or using it to pay premiums. But if you drain the cash value completely, your policy could lapse, so talk to your agent to ensure you have enough to maintain coverage.

You can also raise or lower the death benefit. For example, you might increase it after having another child, which would raise your premiums. Sometimes, this requires more medical underwriting. Decreasing it is simpler—just request it in writing, no underwriting needed.

Advantages and Disadvantages of Adjustable Life Insurance

This type of insurance offers far more flexibility than others. You can adjust premiums and death benefits to match your changing needs, and it builds cash value as an extra savings tool while you're alive. Plus, it can provide coverage for your entire life without an expiration date, as long as you cover the core insurance costs.

On the downside, it requires more effort to manage than a fixed-premium policy like whole life. If you don't pay enough to cover costs, your future premiums could rise, and if you can't afford that, the policy lapses and you lose coverage. It's also pricier than term life, and while the cash value grows, the interest rates are typically low—you might get better returns investing elsewhere.

Guidelines for Life Insurance Policies and Riders

The Internal Revenue Code Section 7702 lays out the rules for life insurance policies to qualify for tax perks, like taking tax-free loans from cash value. Subsection C covers premium payments, and you can't adjust them in ways that break these rules, or you'll lose the tax benefits. Many insurers build in safeguards to avoid this.

These policies often come with optional riders, such as waiver of premium or accidental death and dismemberment.

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

There isn't one—they're the same thing. Adjustable life is just another term for universal life insurance.

What Is a Cash Value Account?

It's the interest-bearing savings part of adjustable life policies. As you pay premiums and interest adds up, the cash value grows, and after a few years, you can borrow against it or withdraw funds.

What Changes Can a Policy Owner Make to an Adjustable Life Policy?

You can alter the death benefit amount, adjust premium payments, modify guaranteed protection or payment periods, and add or remove funds from the cash value.

What Changes Require Additional Underwriting?

Increasing the death benefit might need more underwriting from the insurer. Big increases could even require a medical exam and full review.

The Bottom Line

Adjustable life policies give you flexibility that traditional ones lack. You can tweak premiums, cash value, and death benefits to suit your situation, essentially customizing your insurance for current or future needs.

The specifics of adjustments depend on your insurer's rules. As with any policy, research the company thoroughly to ensure they're one of the top life insurance providers out there.