November 13, 2019

Adjustable Life Insurance

What Is Adjustable Life Insurance?

Adjustable life insurance—also known as flexible premium adjustable life insurance—is a form of permanent life insurance with a cash value component.

With an adjustable life policy, you can increase or decrease the:

Number of years the policy is in force
Face value (death benefit)
Monthly premiums and length of payment period

If you let your policy lapse, the cash value will be returned to you. But you may incur fees on that value if the policy has only been active for a few years (more on this below).

What is the difference between adjustable and universal life insurance?
Adjustable life is often called universal life. But here are 3 main differences:

Adjustable life can be either term or whole life, while universal is always whole life insurance.
Both have flexible premiums, but with universal life, your selection must be kept in force for a certain length of time.
Adjustable life provides cash value at a fixed rate of return while universal life offers a guaranteed minimal amount.

Read on to see how adjustable life differs from other life insurance options.

Pros and Cons of Adjustable Life Insurance

Pros

Adjustable
You can change the amount of your premiums, as well as the face value of the death benefit, as your needs and circumstances change.
Flexible
Pay your premiums monthly, annually, or in one lump sum amount. You can also use the cash value accumulation to pay your premiums.
Cash Value Growth
The policy grows in cash value at a guaranteed minimum rate, but can increase (or decrease) depending on the performance of the company.

The cash value and the death benefit are different. If you pass away, your beneficiary will receive the death benefit, but not any cash value.

Cons

Additional Underwriting
Some requests for a death benefit increase require additional underwriting, even an additional medical exam.
Direct Recognition Method
Companies typically earn a low yield on policy loans. With this method, they reduce the amount of dividends allocated to policies with loans. This could increase fees and interest rates charged to loans against your cash value.
Limited Guarantee
Cash value growth depends on the success of the company. If the company is not profitable, the value will not grow more than the guaranteed minimum rate, which is typically very low.
Surrender Loss
If you surrender the policy within the first 5 or 10 years, you may lose the accumulated cash value.

Who Is Adjustable Life Insurance Best For?
Adjustable life insurance is ideal for those who have changing and/or varying financial needs. This may include business owners, who can set an initial death benefit and adjust it based on their business needs. They can also borrow against the cash value without going through additional credit checks or qualifications.

How Does Adjustable Life Insurance Work?

With adjustable life insurance, you can choose (and later adjust) three things: premiums, death benefit, and cash value.

What kind of special need would a policyowner require with an adjustable life insurance policy?
An adjustable life insurance policy benefits those who require flexible premiums. It allows you to increase or decrease the amount you pay to account for life changes.

For example, if you recently lost your job, you can decrease your premium amount. Or if you want to build up the policy's cash value as retirement draws near, you can increase the premium amount.

Death Benefit

The death benefit is the amount paid to your beneficiaries when you die. You'll want to choose a benefit that will cover your debts, mortgage, or other loans, and provide income replacement should you die prematurely.

You can increase or decrease the face amount of the policy as your needs and circumstances change. Here are some reasons you might adjust the death benefit:

If you have a child (or an additional child), you may want to increase the death benefit coverage.
Once your loans and mortgage are paid off, you can decrease the death benefit.

Keep in mind that a large increase may require additional underwriting, including a medical exam. It can also increase your required monthly premiums. On the other hand, a decrease may lower your premium payments.

Consider this example:

You start with a $500,000 adjustable life policy. A few years later, you have a child and purchase a new house.

You decide to increase the death benefit to $1 million. Then after your children are grown and your mortgage is paid off, you decrease the face amount to $250,000.

Premiums

Premiums are the amount you pay for your policy. With adjustable life insurance, you can increase or decrease the premium payment or frequency of payments. You can even eliminate them altogether by using the accumulated cash value to pay.

Here are some reasons why you might increase or decrease your premiums:

You could pay a higher premium to add to the cash value if you don't have other financial obligations.
If you become unemployed, you can reduce your monthly premium payment amount until you get a new job.

Typically, there is a maximum and minimum premium rate set by the insurance company. You can pay any amount between that range each month. Generally the minimum annual premium is equivalent to the premium for a five-year term policy.

Cash Value

A small percentage of your premium will go into a cash value account overseen by the insurance company. The amount depends on how much or little premium you pay.

The more you pay, the more cash goes into the cash value account to earn interest and grow the account.

Usually, the cash value grows at a guaranteed minimum rate, depending on the policy and insurer. With an adjustable life insurance policy, it also changes based on the financial performance of the insurance company.

With an adjustable life policy, you may want to increase or decrease the cash value if:

You have extra money now and want to grow the cash value for later use.
You are having trouble making premium payments and need to deplete the cash value in order to cover your payments.
You plan on taking a large loan or withdrawal out in the future and want to have a large amount of cash value built up.

Can I cash in a flexible premium adjustable life insurance policy?

You can cancel or surrender a flexible premium adjustable life insurance policy at any time. You'll receive the accumulated cash value and pay income taxes on this amount.

However, the loved ones you leave behind will no longer receive death benefits to pay for your funeral and burial expenses or other bills.

Instead of cashing in an adjustable life insurance policy, you might consider:

Using your policy's cash value as collateral to take out a loan
Withdrawing only a portion of the cash value
Using the cash value to pay some of your policy's premiums

Depending on when you cash in your policy, you may have to pay surrender or cancellation fees.

How Do I Make Changes to the Policy?

Changes are generally only permitted at specified intervals and with advance notice to the insurer. The process for making changes to your adjustable policy differs from company to company.

The first step is to call your insurer or agent. They will let you know if you can increase or decrease your benefit, premiums, or cash value. They can tell you what you need to do and what restrictions may apply.

For some insurers, you must fill out a form (often found on their website) with your intentions for an increase or decrease and submit it to the company. Sometimes you simply have to call the insurer and make a verbal request.

Read your policy carefully, or talk to your agent or insurer, to learn what steps you should take.

Only make changes to your policy when absolutely necessary. Most life insurance companies only allow for a certain number of changes.

Adjustments to the policy will alter the guarantee period and it could change the cash value schedule. Talk to your insurance agent or company to see how changes will affect your policy.

Adjustable Life Compared to Other Insurance Types

Adjustable life insurance operates like a cross between whole life and term life insurance. This hybrid policy covers you for your entire life, but has the flexibility of term insurance.

Read on to learn how it differs from other types.

vs Term
Term life differs from adjustable life insurance in the following ways:

Lasts for a certain period or term. These can range from 5–30 years. Once the term is up, the policy ends, and you no longer have coverage.
No cash value
Level monthly premiums for the length of the policy
Non-adjustable death benefit
Cheaper—on average 10–15 times less expensive than adjustable life insurance

For short-term coverage needs like raising children, a term policy is usually the better choice. You will save significantly in premium payments, and term policies are easier to understand and manage.

vs Whole
Both adjustable and whole life are permanent policies with cash value that can be borrowed against in the form of a loan.

But whole life:

Does not offer an adjustable death benefit
Has fixed premiums for the life of the policy
Grows solely based on the guaranteed interest rate set by the insurance company

vs Variable
Variable life insurance is also a permanent life insurance policy option.

Here are some differences:

Variable life's cash value offers you options for investing the cash value, including stocks, bonds, mutual funds, etc., offered by the insurer.
The cash value of variable life policies has the opportunity to grow much more quickly because of the investment options.

What is a 7702 Plan?

This is another term for permanent policies that have a cash value component, such as adjustable life insurance. It simply means that the policy is compliant with Section 7702 of tax regulations for life insurance.

It includes a tax-free death benefit distribution, and was created to prevent other investment vehicles from taking advantage of those same tax benefits.

Section C of this policy provides guidelines for minimum premium payments. When you increase or decrease your premium payments for your adjustable policy, you must make sure it is in a manner that doesn't violate these guidelines. Don't worry—the insurer or your agent will help you.

Bottom Line

Adjustable life insurance is a useful option for anyone who anticipates significant life changes. That could be having children, buying a home, paying off significant debts, losing a job, or retiring.

These policies give you the ability to increase or decrease the premium amount and death benefit coverage—both of which are significant. But the cash value growth depends partially on the performance of the insurer.

Be sure to weigh the positives and negatives before committing. Being able to adjust the policy is great. But you will pay higher premiums, fees, and taxes, and may be subject to additional underwriting.

Write to Caitlyn Callahan at feedback@creditdonkey.com. Follow us on Twitter and Facebook for our latest posts.