What is Adjustable Life Insurance? How Does It Work?

What is Adjustable Life Insurance? How Does It Work? What are the benefits? Well Adjustable life insurance is a hybrid policy between term life and whole life insurance. Term life insurance is when the death benefit is paid at the time of death if death occurs within a certain number of years; otherwise, no benefit is paid.

What is Adjustable Life Insurance? Explained

Adjustable life insurance goes by a few different names. It’s sometimes called flexible premium adjustable life insurance, or you might also hear the term universal life insurance. These terms mean the same thing in almost all cases. Adjustable life insurance is often thought of as a hybrid of term life insurance and whole life insurance. It provides coverage for your entire life, like a whole life insurance plan, but it also has some of the flexibility that term life insurance typically provides. Remember, adjustable life insurance is another name for universal life insurance.

Adjustable life insurance allows the policy owner to change the coverage of the policy over time without purchasing new life insurance policies. As life changes, people may need more or less life insurance coverage as they have kids, have a home with a mortgage that needs protection, get married, divorced, and children grow up. One adjustable life insurance policy can handle all of life’s changes.

When you purchase your adjustable life insurance policy, you will choose a lump sum amount for your death benefit. This is the amount that will go to your beneficiaries when you die. This will have a certain premium associated with it, which will change as the insured person ages.

Adjustable life insurance policies also have a cash value component like a whole life insurance policy does. When you pay your premiums, part of your payment goes towards the cash value of your insurance. The cash value will earn interest over time, and your monthly payments will go down as your cash value increases. While the cost of insurance will not drop, the premium that you need to pay into the policy does because the compound growth of the cash will pay a higher and higher proportion of your insurance cost.

There is a minimum interest rate that you will earn on your cash payments, but it’s also linked to an investment portfolio, and if your investments perform well, your interest will increase. Once your cash value equals the entire amount of the death benefit, you will no longer need to pay regular premiums on the insurance policy. If you can’t make your monthly payments for any reason, you can tap into your cash value to pay for them.

One of the nice things about adjustable life insurance, however, is that it allows you to change the amount of your death benefit as needed. For example, you might want to increase your death benefit to cover higher expected expenses, or you might want to decrease it after you’ve paid off debts or your children have reached adulthood. You also have some control over the amount and frequency of the premiums you pay, which you wouldn’t necessarily get with other types of life insurance policies.

How Adjustable Life Insurance Works

As mentioned before, adjustable life insurance is a type of permanent insurance that offers the added benefit of flexibility. The premiums are paid on a monthly or annual basis, where a portion of the premiums are paid towards the cost of insurance – such as administrative fees and death benefit coverage – while the other portion goes towards the cash value.

The policyholders are given the option to change the premiums, death benefit, and cash value. The premium is the amount that the policyholders pay for the insurance product, the death benefit is the amount the policyholder’s beneficiaries will receive when the policyholder dies, and the cash value is the tax-deferring savings component in the insurance policy that earns a small amount of variable interest.

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Benefits of Adjustable Life Insurance

Individuals who choose adjustable life insurance do so for the flexibility of the policies. The benefit comes in three parts of the policy that can be changed:

1. Premiums

The policyholder is allowed to change the amount or frequency of payments. However, changes have to be within certain limits set by the issuer.

2. Death Benefit

The policyholder is allowed to increase or decrease the amount that is paid out. The increase of the amount may require additional evidence to reassess the risk of the policyholder, whereas a decrease may lower the premiums that are paid.

3. Cash Value

The policyholder can increase or decrease the cash value of the policy by either increasing premium payments or withdrawing funds as a loan with interest.

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Drawbacks of Adjustable Life Insurance

1. High premiums

Given the flexibility of adjustable life insurance, it usually comes with a higher price. Because of the cash value attached, the policyholders usually need to pay higher premiums.

2. Volatility

Another drawback of adjustable life insurance is that the policy may be affected by the investment portfolio that it is a part of. If the investment portfolio doesn’t perform well, the interest rate on the cash value will be significantly lower. As such, it is worth noting that most investment portfolios tied with such policies are usually low-risk and well-hedged.

All in all, there are not too many downsides with adjustable life insurance, which is why it is becoming a more popular option.

Who Should Buy Adjustable Life Insurance?

Since the biggest benefit of adjustable life insurance is the flexibility attached, the people who choose the option are usually those who expect their financial situation to change in the future.

In the two examples below, we look at a case where the policyholder wants to increase the premiums paid, and another case where the policyholder realizes they temporarily cannot make the payments.

Example A

John is 30 years old, and he just got married a couple of months ago. John and his wife both work steady jobs as accountants at two different corporations.

A year later, John’s wife gives birth to their first child. With the arrival of the baby, he realizes that he needs more insurance. Since he’s taken out adjustable life insurance, John easily increases the premiums that he pays and the face value of the policy to account for the increased need.

Example B

Freddie is 40 years old, and he works at a restaurant as a busser full-time. He lives at home by himself and comfortably pays off the premiums every month for his adjustable life insurance.

One day, the restaurant burns down, and Freddie finds himself without a job. With no source of income for a couple of months until he finds his next job, he can put off paying the premiums for some time, given his financial situation.

Freddie would essentially put a pause on the premiums and tap into the cash benefits of the policy to pay them down for that specific period. Once he finds his next job and obtains financial security, he can resume paying the premiums.

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