Adjustable Life Insurance – What It Is & How It Works

What is adjustable life insurance and how does it work? Adjustable life insurance is a form of permanent life insurance that provides enhanced flexibility in comparison to other policy types.

This insurance gives you the option to modify your premium, thereby influencing the cash value contributions within the policy.

Adjustable Life Insurance - What It Is & How It Works

Also referred to as adjustable term life insurance or flexible premium adjustable life insurance. It grants you the flexibility to adjust the death benefit according to your changing coverage needs.

Distinguishing itself from term insurance, this insurance type lacks a specific end date and remains effective throughout your lifetime, contingent upon the payment of premiums.

Upon your demise, beneficiaries receive a payout, known as a death benefit. Additionally, this insurance type accrues a cash value. This represents a portion of your premium invested in a savings vehicle by the insurer.

How It Works

When you buy a policy, your premiums are determined based on several factors, like your age, health, lifestyle, and other risk-determining factors.

By endlessly paying into this type of insurance. You are guaranteed a death benefit that will be paid to your chosen beneficiary.

In addition, you will get a small amount of interest on the portion that your insurer invests on your behalf. This is known as the cash value.

Flexible Death Benefits In Adjustable Life Insurance

This type of insurance policy gives you the flexibility to change your death benefit, setting it apart from other life insurance types. This means you can increase or decrease the amount based on your specific needs.

However, if you decide to significantly increase your death benefit, your insurance company might require additional medical exams and raise your premiums.

For example, if you’ve recently become a parent, you might choose to raise your death benefit to provide more financial protection for your family in case something happens to you.

On the flip side, if you’ve successfully paid off significant debts like your mortgage, you may no longer require the same level of life insurance coverage.

Your loved ones won’t have to worry about covering that debt if you pass away. In such a scenario, you might consider lowering your death benefit level.

Adjustable Life Insurance Policy

If you have changing needs, this policy can be supportive. For instance, let’s contemplate a policyholder who has another child and wants to increase their death benefit to account for the needs of this new family member.

With adjustable life insurance, the policyholder can increase their death benefit and, as a result, pay a higher premium monthly.

To determine whether this insurance type is right for you, it is beneficial to think about your goals. What do you want in a life insurance policy?

GoalLife insurance policy type
Flexible premiums and death benefitsUniversal life insurance or adjustable life insurance
Lifelong coverageWhole life insurance, universal life insurance, and adjustable life insurance
Pay low premiums.Term life insurance
Fixed premiums and guaranteed cash value accumulationsWhole-life insurance
Earn returns on your cash value account.Universal life insurance or adjustable life insurance
Coverage for a certain amount of timeā€”such as when your children are little or your mortgage is activeTerm life insurance

Benefits of Adjustable Life Insurance

Adjustable life insurance policies provide flexibility to policyholders in three areas of the policy that can be modified: premiums, death benefit, and cash value.

Premiums

Premiums can be changed by the policyholder in terms of either the amount or frequency of payments, but there are certain limits set by the issuer that must be adhered to.

Death Benefit

The death benefit can neither be increased nor decreased by the policyholder. However, an increase may need additional evidence to reassess the risk of the policyholder. While a decrease may lower the premiums paid.

Cash Value

Lastly, the cash value of the policy can be increased or decreased by the policyholder. This can be done by either increasing premium payments or by withdrawing funds as a loan with interest.

Drawbacks of Adjustable Life Insurance

High Premiums

Adjustable life insurance offers policyholders greater flexibility compared to traditional policies.

However, this flexibility comes at a higher price, as policyholders need to pay higher premiums due to the cash value attached to the policy.

Volatility

One possible drawback of this insurance type is that the policy may be affected by the performance of the investment portfolio it is a part of.

If the investment portfolio fails, the interest rate on the cash value will be lower. That is the reason most investment portfolios tied to such policies are usually low-risk and well-hedged.

In conclusion, despite these drawbacks, this insurance policy has become increasingly popular due to its customization options.

Policyholders can adjust their premiums, cash value, and death benefits based on their current or anticipated needs.